The Company Liquidation Process – What Happens

What does company liquidation mean?

Liquidation is the process by which a company’s assets are “liquidated” and turned into cash that can be used to pay back money that it owes to its creditors.  If the company is solvent, then the money can be distributed to its owners (members).  The purpose of liquidation is ultimately to close the company and have it removed from the Companies Register.  Only a Licensed Insolvency Practitioner can act as a liquidator.  In the case of an insolvent liquidation then the rules and regulations are governed by the Insolvency Act 1986.  Most liquidations are where the company is insolvent and is no longer viable.  For solvent liquidations the process is called a Members Voluntary Liquidation.  For the purposes of this guide, we will concentrate on insolvent liquidations as these make up the majority of which there are 2 types.

1. Creditors Voluntary Liquidation (CVL)

   where the directors decide the company is insolvent and needs to stop trading. They may be worried about wrongful trading and the position getting worse. They then ask the shareholders to appoint a liquidator.

2. Compulsory Liquidation

   where the creditors of the company decide it is insolvent and they petition the court, using a winding up petition, to put the company into liquidation.

Why might a company liquidation be necessary?

The company simply cannot pay its debts as when they are due and so is insolvent.  This might be the result of

• Poor market conditions
• a customer going bust owing them money,
• increasing overheads
• facing court action for damages
• Poor financial controls or even theft from the company.

Consequently

• The company is facing legal threats from creditors such as warnings of winding up petitions, statutory demands, and county court judgements.
• The company has fallen behind on its payments to HMRC and is facing enforcement actions, such as visits from bailiffs or threats of a winding up petition.
• The liabilities of the company are greater than its assets, so it is insolvent on the “balance sheet test”

So, the directors are worried about the possibility of wrongful trading.

If you find yourself in this situation, then it is vital that you get expert advice from an insolvency practitioner or an insolvency expert at a licensed firm.  Once a company is insolvent then the directors need to act in the best interest of creditors and act.  Failure to do so can make directors personally liable and face disqualification.  If the company is forced into a compulsory liquidation scenario, then it does show that the directors failed to act in a timely manner.

Remember that there are alternatives to liquidation!  We could negotiate with creditors on your behalf and try and get time to pay arrangements. If the company is viable in the long term then a company voluntary arrangement or CVA might be a possibility.  See our guides on the CVA mechanism on this website.  If the company has no future then liquidation is the correct way forward.

How does the creditors voluntary liquidation (CVL) work?

Board Meeting:

The directors convene a board meeting to assess the company’s financial position and determine if it is insolvent. If they agree that CVL is the appropriate course of action, they will pass a resolution to initiate the process.

Appointing an Insolvency Practitioner

The directors must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP’s primary responsibility is to oversee the liquidation, realize the company’s assets, and distribute the proceeds to the creditors.

Shareholders Meeting

Usually just before the creditors’ meeting where the shareholders agree to place the company into liquidation.

Creditors’ Meeting:

The IP will convene a creditors’ meeting, typically within 14 days of the board meeting, to inform the creditors about the company’s financial position, the proposed CVL process, and to seek their approval. At this stage the creditors get to see what is termed an estimated Statement of Affairs (SofA).  This document sets out what the position of the company is, what it owes it creditors and whether there is likely to be any dividend paid out.

Using the deemed consent process there is no need for an actual creditors meeting.  Notices go out about the proposed liquidators and if no objections are raised within 14 days, then the liquidation process starts.

Who gets paid first in the liquidation?

The order of priority is set out in the Insolvency Act 1986 and is as follows

1. The liquidators’ costs to carry out the liquidation are the first to be paid (subject to creditors approval)
2. Secured creditors. Those creditors who have fixed charge over the assets of the company. This is usually the bank or any lender.
3. Preferential creditors. These are the employees for arrears of pay and redundancy. This can usually be claimed from the redundancy payments office (RPO).  HMRC are now classed as what is known as a secondary preferential creditor for VAT and PAYE
4. Creditors who have Floating charge over assets that can change and are traded in the course of business such as stock and work in progress, also assets that are not subject to a fixed charge.
5. Unsecured creditors such as suppliers, contractors, customers and HMRC for certain taxes other than VAT and PAYE.
6. Connected unsecured.
7. Shareholders come last.

It should be noted that in a liquidation it is usual for there to be no recovery to unsecured creditors

Can I start another company after liquidation?

Yes, you can. However, if you have been the director of a liquidated company, and you set up a new company it cannot have the same or a similar name to the old company.  This is to reduce any confusion for creditors of the old company.

This is called passing off (under section 216 Insolvency Act 1986). It can lead to criminal action against the director, or being held liable for all of the debts of the new company if it goes into liquidation.   Also bear in mind that if you owed HMRC substantial sums in the old company then they are likely to ask for a VAT deposit.

Liquidation vs Administration

Administration is different in that its primary purpose is to rescue the company as a going a concern so there must be some chance of survival or a sale.  In addition, a company can only enter administration if it can be shown that it will achieve a “better result” than liquidation.  Administration is a powerful insolvency mechanism which is best suited to large businesses as the costs can be quite high.

How much does the liquidation cost?

The costs of the liquidation very much depends on the complexities of the case and the likely time it will take the Insolvency Practitioner to carry out their duties and responsibilities.  The main things to consider are;

• The number of creditors and how much is owed.
• How many employees there are
• Are there any book debts to collect
• How much investigation is needed into the company’s affairs.

The costs of liquidation can put directors off but not doing anything is likely to cost you more in the long run!  Generally, our minimum fee is £4000 + VAT. This would be for liquidating a company with a single creditor, such as having an unpaid Bounce Back Loan (BBL) or HMRC. For more complex issues including companies who have landlords, employees, BBLs and supplier debts we will provide a written quote after our meeting with the directors to discuss the company’s options.

What impact does the liquidation have on the directors.

In any liquidation the conduct of the directors is investigated by the liquidator.  The Liquidator MUST file a Directors Conduct Report with the Department of Business and Trade on any director who was a director at the date of liquidation and 3 years prior.  If the report finds that the directors were responsible for the company’s demise, by acting wrongfully or unlawfully, then they can expect sanctions ranging from being held responsible for the company’s debts and/or being disqualified as acting as directors for upto 15 years.  If the directors have done nothing wrong, then there is not much to worry about.  It might be a bit more difficult to raise finance for a new company if you have been a director of a liquidated company before.  Especially so if it has happened more than once.

If you want advice on your particular issue then call us on 08009700539 Out of hours you can call Keith Steven on 07833 240747.

Why not read our extensive downloadable guide to Liquidation