If you are thinking of closing an insolvent company, then the costs of liquidation are likely to be one of your biggest concerns.
When the company is already struggling financially, the last thing you want is to incur another cost. However, the benefits of choosing to liquidate the company voluntarily make this sort of closure the most desirable way to bring an end to your company when dissolution is not an option.
The voluntary route for liquidating an insolvent company is called a Creditors’ Voluntary Liquidation (CVL). The other route is compulsory liquidation, ordered by the court.
In a creditors’ voluntary liquidation, a licensed insolvency practitioner must be appointed as liquidator to control the process. (In a compulsory liquidation the Official Receiver acts as liquidator first.) It is the liquidator’s job to identify the company’s assets and liabilities, value and sell the assets and distribute the proceeds to those who are owed money by the company (its creditors) before it’s closed down.
Why Might you Choose a Voluntary Liquidation?
Although the liquidation process is primarily designed for the benefit of company creditors, there are also significant benefits for the company directors themselves.
Be clear about what a voluntary liquidation does and does not do here. Taking action promptly can help demonstrate that the directors behaved responsibly and tried to minimise further losses to creditors, and that counts in your favour when conduct is reviewed. It does not prevent the review. Entering a CVL does not stop a liquidator investigating what happened before the liquidation, or bringing claims where the evidence supports them.
What delay changes is your exposure. The longer a company trades on after the point at which there was no reasonable prospect of avoiding insolvent liquidation, the larger the loss to creditors over that period, and that loss is what a wrongful trading claim looks at. The court decides what, if anything, a director must contribute, and it cannot order a contribution if the director took every step they should have taken to minimise the loss to creditors. Misfeasance, preferences, transactions at undervalue and overdrawn director’s loan accounts are separate matters again, and each can lead to a personal liability, a disqualification, or both.
By entering liquidation voluntarily, you keep more say over the process than you would in a compulsory liquidation. You and the other members can nominate a liquidator and choose the timing, though creditors have statutory rights in the appointment process and, under section 100 of the Insolvency Act 1986, their nominee becomes the liquidator if they choose someone different, unless a director, member or creditor applies to court within 7 days of the creditors’ nomination and the court orders otherwise. Once appointed, the liquidator acts independently and the directors no longer control the company’s affairs.
In England and Wales, if you wait to be forced into compulsory liquidation by a creditor, the case starts with the Official Receiver, a civil servant of the Insolvency Service and an officer of the court. (Scotland has no Official Receiver: the court appoints an interim liquidator when it makes the order.) You have no say in who that is, no say in the timing, and the process is more intrusive as a result.
How Much Does Liquidation Cost?
The cost of liquidation depends on the complexity of the case, which is based on factors such as the company’s size and its overall financial situation, the number of creditors and shareholders and the value of its assets.
For a relatively small limited company with just a few assets, you can expect to pay in the region of £4,000-£5,000 + VAT.
For a larger company with a greater number of assets, you can expect that fee to rise considerably due to the added complexity and the extra time it will take to wind the company up.
What do the Costs of Liquidation Cover?
In a creditors’ voluntary liquidation, an insolvency practitioner must be appointed to act as the liquidator and close the company down. The cost of liquidation will cover a wide range of duties they perform during that time. That includes:
- Explaining to directors their legal duty to cooperate with the liquidator (the liquidator acts for creditors, not the directors, so directors should take separate advice on their own position)
- Settling legal disputes or any outstanding contracts
- Making employees redundant and processing claims for monies they are owed
- Collecting debts owed to the business, including money owed by the company directors
- Meeting deadlines for the relevant paperwork and keeping Companies House, HMRC and the Insolvency Service informed
- Investigating transactions that took place prior to liquidation
- Keeping creditors up to date with the progress of the liquidation
- Valuing and realising company assets
- Distributing the proceeds to the company’s creditors
How Can you pay the Costs of Liquidation?
Despite the clear advantages of a voluntary liquidation, some directors can be reluctant to take this approach because the costs of liquidation are simply out of reach, particularly for the directors of smaller insolvent firms.
However, it is possible to fund voluntary liquidation without any cost to the directors personally.
Under certain conditions, limited company directors can claim redundancy pay and other statutory entitlements, which can be used to cover the cost of liquidation.
How much you could claim depends on your age, your length of service and your weekly pay, all subject to statutory caps, so it is worth checking your eligibility.
If you are…
- On the company payroll
- Continuously employed by the company for at least two years, if you are claiming statutory redundancy pay. Unpaid wages, holiday pay and notice pay have no two-year qualifying period
- Able to evidence a genuine employment relationship, through payslips, P60s and bank statements showing regular payment. There is no minimum number of hours a week
… then you could be eligible. Here’s more information about director’s redundancy payments.
What if You Can’t Afford an Insolvent Liquidation?
The costs of liquidation can also be met by the sale of company assets.
Our licensed insolvency practitioners will arrange a valuation by a valuer regulated by the Royal Institution of Chartered Surveyors (RICS) before the assets are sold. The money raised can then be used to settle the liquidator’s fees.
If you’re not eligible for director’s redundancy payments and there are insufficient assets to cover the costs of liquidation, some directors choose to pay using their own personal funds.
They may choose to sell personal assets to raise the funds they need or use personal savings. If there are a number of company directors who are willing to contribute, you may be able to cover the costs without being left out of pocket.
Although paying for a liquidation using your personal funds is unlikely to be a favourable option, it’s important you consider the potential ramifications if you do not opt for voluntary liquidation and wait to be forced into compulsory liquidation by a creditor.
Need advice?
While we hope this article has answered some of the questions you have about the costs of liquidation, we know there’ll be much more you’d like to ask.
Please get in touch. In a free, confidential initial consultation without obligation, we will explain the liquidation process, the likely costs and the options open to the company. If you need advice on your personal position as a director, we can tell you when to take separate advice.