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What is Company Liquidation?

Written by Keith Steven Managing Director 9 April 2021

Liquidation Sale Sign

What does it mean when a company goes into liquidation? What happens to it afterwards?

If a company goes into liquidation this means its assets i.e. property and stock, are "liquidated" - turned into cash for payment to the creditors of the company, in order of priority.

Liquidation results in your company being removed from the register at Companies House as it ceases to exist.

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)

Note that for voluntary liquidations, it is begun by shareholders and directors but for compulsory liquidation, creditors bring on the process from ordering a court order upon the company.

What is Creditors Voluntary Liquidation?

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

Usually, the company runs out of cash and cannot pay its debts on time. The directors are concerned that the business is simply not viable as creditors are threatening legal action. In essence, 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 become subject to a disqualification.

The main job of the liquidator here is to realise the assets and distribute any to creditors i.e. writing off any debts.

What are the implications for the directors in creditors 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.  In summary

  • 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. 
  • Personal guarantees will be called in if applicable as lenders are unlikely to get all their money back.
  • You may find that business insurance will be a bit more expensive, or less choice, for you in any new company

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. Likewise, 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 and 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.

This type of liquidation is appropriate when a company plans to close or wants to reduce taxes.

And now to some common questions we hear:

What is the process to liquidate a company?

Each type of liquidation has a similar, yet unique approach.  This being said, there are some basic steps which each liquidation involves:

  • The appointment of an insolvency practitioner/liquidator
  • Assets of the company being liquidated
  • Creditors, in order of priority, are paid using the liquidated funds
  • Shareholders receive any extra cash once everyone needing to be paid has been paid

In most and if not all situations too, the end result is the company ceasing to trade, thus being struck off the register at Companies House.

How much time does it take?

This is variable to each situation and of course each type of liquidation. However, typically once the insolvency practitioner is appointed, it takes between 2 and 3 weeks for the company to be placed into liquidation.

Remember:

If you have received a statutory demand from a creditor, you only have 21 days to pay it and if unable to be settled, a winding up petition will be applied for by the creditor (since they have the right), which takes up to 2 weeks. Within 14 days of the winding up petition, it is a legal requirement to conduct and engage in a winding up hearing.

Until the process is fully complete, the liquidator remains responsible in overseeing the process in is entirety. To find out more about the role of the liquidator, see our page here.

How much does the liquidation process cost?

Typically the initial cost is between £3500 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.   

Will I get paid from a company in liquidation?

Employees

If you are an employee of the business then you may not receive 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.

Can I liquidate my own company?

No!

It is essential that a licensed insolvency practitioner manages the process.

It may be the situation that you, as a director, fear not being able to afford the costs of the liquidation. However, be assured – liquidations do not require additional cash spent – you can simply pay for it from the funds made by realisation of company assets (of course this meaning fewer funds to pay your creditors) or from directors redundancy payments.  If the assets do not cover the costs then you will need to fund this from personal monies.

So what should i do?

After reading all this information, if you feel this process is relevant to you or if you seek further advice, please get in touch with us and we can discuss your options. 0800 9700539. 

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

A Worried Director

The Ultimate Guide For Worried Directors

Worried about poor cashflow? Feel you have got into a bit of a mess? Covid-19?, How to pay wages on pay day? For reassuring advice on a range of issues download our free Ultimate Guide For Worried Directors today. Or just call us on 0800 9700539

Please note that the guide includes updates due to Covid-19 For instance there have been some changes to insolvency legislation that limits creditors actions.  A new 20 day moratorium for distressed businesses has also been introduced. 

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