What Does Liquidation Mean?

Written by Keith Steven Managing Director 18 September 2020

Liquidation Sale Sign

What does it mean when a company is liquidated and what happens to it afterwards?

If a company goes into liquidation then its assets, for instance, property and stock,  are "liquidated" or turned into cash for the creditors of the company.  There are three types of liquidation

  1. Creditors Voluntary Liquidation
  2. Compulsory Liquidation
  3. Members Voluntary Liquidation (cash is returned to the members as the company is solvent )

What is Creditors Voluntary Liquidation?

Creditors voluntary liquidation (CVL) is the most common form of liquidation in use in the UK.  There are about 10,000 of these liquidations each year.

Usually, the company has run out of cash, it cannot pay its debts on time and the directors are concerned that the business is simply not viable as creditors are threatening legal action. In other words, it is appearing an 'insolvent company'.

The company directors then ask a liquidator, who must be a licensed insolvency practitioner (IP), to convene a meeting of the creditors of the company within 14 days.  At the meeting, which is now often held virtually, the IP will present a statement of affairs of the company to outline the current position and explain the procedure.  The creditors then vote on the appointment of the liquidator to "liquidate" the assets to try and repay them (hence it is called a "creditors" liquidation).

Once the liquidator is appointed the directors no longer have any control or duties in relation to the company but they are duty-bound to cooperate with the insolvency practitioner and provide information in a timely manner.  The IP will then look into the conduct of the directors and if there has been very bad practice, misfeasance or fraud then they may recommend a disqualification.  The director may be able to claim redundancy from the government if they were an employee and this is a simple 25 minute process.

How much does the liquidation process cost?

Typically the initial cost is between £4000 and £6000 + VAT to prepare all the paperwork and organise the meetings.  Be cautious of advisors saying they can do it for £1500 or so - this is for sure, too good to be true. The cost of the liquidation may be lower but the risk to you personally is very high, especially if you owe the company any money. Additionally, you will probably end up dealing with all the creditors and will find it difficult to move on.  Liquidation is a highly regulated insolvency process and there are NO shortcuts.   

What are the implications for the directors in voluntary liquidation?

You can liquidate a company and start the same or a new business again, but only under strict rules and conditions. This is a potential legal "minefield" and you need to take proper advice.  Most importantly you cannot use the same or similar trade or business name as the liquidated company without leave of the court or permission from the IP.  It is likely that HMRC will ask for a VAT deposit from the new company if they have been a significant creditor in the previous company.  As a director, if you owe the company money i.e. have an overdrawn directors loan account then the liquidator will seek to claim this from you.  If the loan is substantial and not justifiable then they will take action against you.  Of course, personal guarantees will be called in if applicable as lenders are unlikely to get all their money back.  It should be noted that HMRC will come before floating charge holders in the order of priority for creditors come December 2020.  This is likely to leave directors more personally exposed in insolvency as they will have given personal guarantees to these floating charge holders as well. 

Call us or read our Experts Guide to Creditors Voluntary Liquidation (see link below) if you want more details. This FREE guide tells you all you need to know about liquidation or call us on 0800 9700539 for a free chat through your company's issues. 

Why not download our  new 2020 voluntary liquidation guide

What Happens In Compulsory Liquidation?

A compulsory liquidation is when the creditors of the company have lost all patience to try to collect the debt. The debt must be over £750, must be undisputed, and the creditor must have notified the debtor of its intent to collect the debt. This often involves issuing a statutory demand first. If the debtor fails to pay the statutory demand in 21 days and does not dispute the debt, then the creditor may issue a winding-up petition.   

If the judge grants the winding up order then the official receiver will interview the director, liquidate the assets of the business to try and repay the creditors.   This process generally takes much longer than a voluntary liquidation and is more stress and hassle for the directors involved.  What is more, the official receiver has a mandatory duty to look at the behaviour of the directors.  They will also have more resources to pursue any money that the directors owe the company which could result in personal insolvency. 

Can I stop the process?

Once a winding up petition is issued then it is difficult to stop the process.  The only way to stop the liquidation is to pay the debt or get the petitioner to agree to withdraw the petition.  It may be possible to get an adjournment of the winding up hearing to allow more time to find the funds or maybe even get a company voluntary arrangement organised but you will need to move very quickly!

What are the implications for the directors in compulsory liquidation?

Much the same as for voluntary liquidation in fact.  As mentioned earlier, it is likely that the official receiver will more aggressively collect monies owed by the director to the company.  They also have a mandatory duty to investigate the directors actions compared to a discretionary duty of a liquidator in a voluntary liquidation.

What Does Members Voluntary Liquidation Mean?

A Members Voluntary Liquidation (MVL) is the formal process to bring a solvent company to a close. It can be known a 'solvent liquidation'. A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, settle any legal disputes and pay any outstanding creditors and then distribute the remaining surplus funds to the company’s shareholders/members. In a MVL, the company must have paid or be able to pay all of its creditors and contractual liabilities.  Once the liquidator has completed these formalities and received clearance from HMRC, the company will be dissolved and formally removed from the companies register meaning it will no longer be registered at companies house.

A Members Voluntary Liquidation requires 75% of shareholders who have been given notice of the meeting of members to pass the winding up resolution.

Will I get paid from a company in liquidation?

This is a question that many people ask. 

Employees

If you are an employee of the business then you may not recieve your last months wages but you will be able to claim from the redundancy payments office for arrears of pay, holiday pay and money in lieu of notice.  Please see our page for employees here.

Creditor of the company

Realistically, you are unlikely to receive much money in liquidation - maybe 5p in the £1. If you are secured creditor i.e. if you have a charge over the assets of the company then you may receive more or even everything back but it completely depends.  For more information on who gets paid first in liquidation then see our page on creditors priority

Categories: Complete Guide to Creditors Voluntary Liquidation CVL, Implications for Directors, Worried Director What Will Happen To Me After Liquidation?

Keith Steven

The Author

Author of this page is Keith Steven who is the Managing Director of KSA Group Insolvency Practitioners

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