Even though the process is straightforward, company liquidation can present a number of issues that must be addressed to ensure that the process is carried out correctly.
Here’s what you need to know to make that important decision for your company, prepare for the process, avoid any unnecessary stress and, finally, move on.
What is a Liquidator?
A liquidator or an official receiver manages the entire liquidation process. He or she is appointed when a company goes into liquidation or is wound up by the Court in a compulsory liquidation process, which is brought about by a disgruntled creditor.
What Powers Does a Liquidator Have?
The liquidator has a wide range of powers that enable him or her to realise or sell the company’s assets and use the proceeds to settle debts. The liquidator takes control of the business, meets deadlines for paperwork, keeps the authorities informed, settles all claims against the company, interviews the directors and reports on the reasons for the liquidation. He or she will also dissolve the company in other words remove the company from the public register at Companies House.
What’s the Aim of Liquidation?
Liquidation marks the end for most businesses as it results in the company’s closure when its assets are sold and the proceeds are used to settle creditor claims. The liquidation process recovers funds for creditors and ends all legal action against the company and its directors. However, company closure typically sees little return for directors/shareholders.
What Happens When a Liquidator is Appointed?
A liquidator can be appointed in one of a number of insolvency procedures, such as a Creditors’ Voluntary Liquidation (CVL), which occurs when the decision to liquidate the company is taken voluntarily by directors faced with an insolvent company that is unable to pay its creditors in full. The directors take the decision to close down the business and start afresh. In this scenario, the process is initiated by the directors and not the company’s creditors.
The CVL process involves calling meetings of shareholders and creditors to pass the appropriate resolutions and to appoint a liquidator who is a licensed Insolvency Practitioner (IP). The liquidator is appointed to close the company in a professional manner, making sure a fair distribution of the company’s assets takes place amongst creditors. Neither the Court or the official receiver are involved in a CVL procedure.
Liquidators are also appointed in Members Voluntary Liquidation (MVL). This is where the company is solvent and is able to pay all of its creditors in full. Directors frequently take the decision to go down the MVL route for tax purposes or to restructure the company. In this scenario, the appropriate resolutions must be passed at a general meeting to wind up the company and appoint a liquidator.
Who Appoints Official Receiver (Liquidator)
In contrast, an official receiver is typically appointed when a company is forced into liquidation by irate creditors and a winding up order is issued by the Court. His or her role in this situation is to investigate the reasons behind the company’s failure and to deal with its assets and liabilities.
What is the Difference Between a Liquidator and a Receiver?
The main differences between a liquidator and an official receiver are not the roles themselves, but the insolvency procedures that they administer and manage. A liquidator is appointed by the directors in a MVA or a CVL, which allows the directors to retain an element of control over the process. An official receiver is appointed as liquidator by the Court when a winding-up order has been granted as a result of a creditor(s) forcing a company into compulsory liquidation.
That said, the official receiver may seek the appointment of liquidator if he or she believes that the complexity of the case requires and IP appointment.
What are the Rights and Duties of the Liquidator?
The liquidator has a host of powers, depending on the type of liquidation that he or she is administering. Their main responsibility is to convert any remaining assets or property of the company into cash to repay as many creditors as possible. In addition to a wide range of admin tasks, such as paperwork, he or she will have to investigate director conduct and schedule meetings with creditors and directors. The specific duties of the liquidator will also include the following:
- To assess all debts and decide which should be repaid in full or in part. In some cases, claims can be rejected
- Bring to an end any outstanding contracts or legal disputes
- Seek valuations for company assets to maximise returns for creditors
- Closely inspect the restoration of property that may have been sold at undervalue
- Keep creditors informed and involved in the decision-making process where appropriate.
- Communicate how creditor claims are progressing, the reasons why the company failed as well as details about the redistribution of assets
- Distribute funds to creditors fairly, taking into account the repayment structure which begins with the fees and expenses of the liquidation process itself
- Interview and report on the factors that led to the company’s demise and liquidation. Report to the Secretary of State if he or she identifies director misconduct or fraud
- Dissolve the company.
What are their Fees and how do they get Paid?
Following the official hierarchy of repayment, which is laid down by the Insolvency Act 1986, the liquidator’s fees and expenses are always first to be paid. These are followed by payments to secured creditors with a fixed charge, such as a bank, preferential creditors and unsecured creditors and, finally, shareholders. When a company becomes insolvent and begins a formal insolvency procedure, each class of creditors is paid in full before funds are allocated to the next tier or to an inferior debt.
Are the Fees tax Deductible?
The old accounting period ends the day before the appointment of the liquidator and a new one begins on the day of the appointment. Once a liquidator is in place, the new accounting period will end once the winding up has concluded or after 12 months, if it’s earlier.
Fees and expenses relating to the liquidation are not tax deductible as once a company stops trading it can no longer receive a trading deduction for expenses. This means that the cost of liquidation should be taken into account when valuing assets at company closure and expenses accrued.
Can a Liquidator Disclaim a Contract or Lease?
When an insolvent company goes into liquidation, the liquidator’s main duty is to realise the assets and property of the company and use the proceeds to pay off the company’s debts and liabilities. That said, one of the liquidator’s key powers is the right to disclaim “onerous property”. Put simply, this means that any contract that is unprofitable or company property that is unsaleable or produces liabilities can be disclaimed by the liquidator. For instance, a commercial lease is typically “onerous” as there’s a liability to pay rent and other sums to maintain the property.
What is the Liquidator’s Final Statement of Account?
During every liquidation procedure, the liquidator must prepare a final statement of account, which shows how much he or she realised for assets and property and how that amount was redistributed. The final statement of account shows receipts and payment of cash. In line with legislation, payments are made to creditors following the official hierarchy of repayment.
When does a Liquidator Vacate Office?
Once the company’s affairs are fully wound up, the liquidator will give notice to the company’s directors, creditors, and the Court. At this time, creditors have the right to request further information from the liquidator, challenge his or her fees and expenses or even object to his or her release from office. However, this must be done in writing up to eight weeks after the liquidator has given notice, according to protocol.
If everything is fully wound up and in order, the liquidator, once he or she has delivered the final statement of account to Companies House and given notice to the Court, stating that no creditor has objected to his or her release, will be released and vacate office.
Let Us Help
Liquidation may be the appropriate route to take to wind up and dissolve your company entirely. If you are unsure and would like to know more about the role of the liquidator or about the liquidation process itself, please call 0208 444 3400 or email info@aabrs.com for free and confidential advice from one of our professional advisers.