This article is intended as a comprehensive guide to liquidation proceedings for company directors, explaining how it works, the liquidation process, and the consequences.
What Does it Mean to ‘Liquidate a Company’?
Liquidation, also known as ‘winding up’ a company, is the process through which a company is closed, its assets sold to pay off any debts, and the remaining proceeds are divided between the shareholders.
It is attempted when business rescue is no longer an option, and the best decision is to simply close down the company.
The liquidation of a company will mean all employees lose their jobs, and the business will legally cease to exist.
What are the Types of Liquidation?
If a company is insolvent (i.e. cannot pay its creditors as and when payments become due or its debts outweigh its assets on the balance sheet), then it will be liquidated voluntarily (by directors who recognise that the company can go no further) using a process known as Creditors’ Voluntary Liquidation (CVl.)
If you suffer from continual cash flow problems and cannot pay your bills, this is a very strong indication that you may be insolvent.
Insolvency, however, doesn’t always mean you need to liquidate. Insolvency practitioners are adept at busines rescue processes such as administration.
The second possibility for insolvent companies is that they are forced into a compulsory liquidation procedure, by creditors.
If the company is solvent, a Members’ Voluntary Liquidation is the appropriate method for liquidating a solvent limited company with assets.
This is an efficient method of closing down a company that includes the possibility of taking advantage of Entrepreneurs Relief, which offers a lower rate of taxation.
Read our full article on MVL’s here.
What Happens to a Company When it Goes into Liquidation?
The process is as follows.
Having recognised either the possibility or the fact of insolvency, you shoud make contact with an insolvency practitioner (IP).
Once formally appointed the insolvency practitioners (IP) will advertise the liquidation in the Gazette (Official Journal of Public Record) and alert creditors as to the situation.
Formal meetings (usually virtual) take place where the IP can communicate with the creditors and answer any relevant questions.
Directors powers cease, all employees become redundant, and the IP proceeds with assessing what money exists to pay back creditors.
Once everyone has been paid, the company is struck off the register at Companies House and formally ceases to exist.
Who is Paid First?
The IP will have any assets independently valued then sold, and the money will be distributed to creditors in order of priority.
The liquidator’s own fees come first, followed by:
- Secured Creditors
- Creditors Holding a Fixed Charge
- Creditors with a Floating Charge
- Preferential Creditors
- Unesecured Creditors
What are the Grounds for Winding Up a Company?
A creditor has the right to issue a winding-up petition to the courts if it is owed an amount of more than £750 and the company cannot pay.
It must have previously served a Statutory Demand on the company, and no agreement or payment been made in response to the demand.
The creditor will have to pay the court fees and a deposit (which is repaid by the company if it has sufficient funds), so it is not usually a decision that is taken lightly by creditors.
The Winding up Order
After the winding up petition has been issued, there will be a court hearing for the courts to hear the evidence and to decide whether to make a winding up order. If the order is made, the court will appoint an official receiver to realise the company’s assets, distribute the proceeds to creditors and wind the company up.
This is the least palatable of the three kinds of liquidation: not only is the company forced into liquidation, but it is a very public process that can be damaging to the reputation of the company and its directors.
If you are being threatened with a Compulsory Liquidation, you should seek professional advice immediately to discuss your options.
Read more about Compulsory Liquidation proceedings.
What Does it Mean When a Company Goes into Voluntary Liquidation?
A Creditors’ Voluntary Liquidation (CVL) will be used where the company is insolvent and the liquidation process is instigated by the directors.
As the business is insolvent, when it is liquidated the proceeds from the company assets will not be enough to pay off its arrears in full and there will not be any leftover proceeds to be shared between the shareholders.
How do I put my Company into Voluntary Liquidation?
In a Creditors’ Voluntary Liquidation (CVL) the directors will appoint a licensed insolvency practitioner to convene meetings of the shareholders and the creditors.
The shareholders need to pass a winding up resolution by at least 75%, which also appoints the insolvency practitioner as the liquidator. The creditors then can vote to ratify the appointed liquidator, or to appoint an alternative liquidator.
The liquidator(s) will then realise the company’s assets and distribute them to the creditors in their order of priority before dissolving the company.
Can I Liquidate my own Company?
While this is a commonly asked question, the simple answer is no. The law requires that liquidation be carried out by a licensed insolvency practitioner.
If you are concerned that you won’t be able to afford the costs of liquidation, do give us a call to discuss your situation and we can try to explain the best deal available to you for a cost-effective insolvency. Liquidations are usually paid for, in any case, from the realisation of assets rather than the directors own finances. There are also options to pay for it via statutory directorial redundancy payments.
Can I Start a new Company after Liquidation?
There is no law preventing directors whose companies have been liquidated from serving as a director again. The only restrictions concern the starting up of a new company with either the same or a similar name to the previous one. Section 216 of the Insolvency Act contains laws against this which we cover here.
What Does Liquidation Mean for Employees?
Insolvent liquidation will mean the end of the company, and hence all employees will lose their jobs. Employees do have a right to claim money owed to them via the insolvency practitioner overseeing the case, although whether this can be paid will depend on how much money is raised by the realisation of assets.
Should the company coffers be empty, and with no assets to liquidate, the government offers redundancy payments, wage arrears, holiday pay, and unpaid pension contributions up to certain statutory limits.
How Long does it take for a Company to Liquidate?
It usually takes up to two weeks to appoint a liquidator, after which point the directors powers cease. Actually realising the assets of the company, however, is a more protracted process and varies hugely depending on the size and complexity of the company situation. On average it takes between 6 and 24 months to complete a liquidation.
Which Should You Choose?
If you want to liquidate your company and the company is solvent, you will need to use a Members’ Voluntary Liquidation.
If company is insolvent and liquidation is unavoidable, a Creditors’ Voluntary Liquidation is the preferable route as directors have more control over the process and it does not involve the courts. Read more about the advantages of a Creditors’ Voluntary Liquidation over a Compulsory Liquidation here.
How Much Does it Cost to Liquidate?
Most liquidations can be paid for out of either the assets sold by the liquidator, or directors’ redundancy payments.
Liquidations vary considerably in cost as the insolvency practitioner usually charges on a time basis which means the larger and complex the company the more hours will be spent.
Generally speaking the liquidation of a small business would be around £4000 to £6000 + VAT.
Liquidation will mean that the company ceases trading, employees are made redundant, and directors’ powers cease. The insolvency practititioner will assume responsibility for dealing with creditors and, at the end of the process, the company will be struck off the register at Companies House.
Directors will be free to start another company, or become a director of another limited company, assuming there has been no directorial ban.
Can I Start a new Company After Liquidation?
It ‘s quite possible to start another company after liquidation, assuming the law is followed. The practice of phoenixing – that is starting one company from the ashes of the old – is allowed but the assets must be independent valued to avoid any loss to creditors.
A process known as pre pack administration is the correct way to sell off assets from a business that is insolvent to a seperate limited company.
Are Directors Personally Liable for Company Debts?
In principle, the limited company structure is designed to maintain distance between personal and corporate finances. This means that insolvency should generally mean the directors’ can walk away, without having any fallout into their personal money.
There are exceptions to this, for example when a personal guarantee is signed. These documents, often required by lenders when signing a loan, are specifically designed to pierce the corporate veil and make personal assets available to the lender in the case of an insolvency event.
Another example would involve wrongful or fraudulent trading. Where it is discovered that a director knowingly and/or willfully placed his or anothers interest first when the primary responsibility is to creditors it is possible for HMRC to demand that this money, and potentially additional penalties, are paid back personally.