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Company Liquidation: Explained
The formal insolvency process of liquidation is used for the sole purpose of closing a company and dissolving it from the Companies Register. To enter into liquidation, a business will need the help of an appointed liquidator, which will be a qualified Insolvency Practitioner.
Here at The Insolvency Experts, we can help to guide your insolvent, or solvent, business through liquidation and provide you with expert advice and necessary financial guidance.
- What does liquidation mean?
- How does liquidation work?
- Types of liquidation
- Can my company continue to trade during liquidation?
- How long does the liquidation process take?
- How much does liquidation cost?
- Advantages & disadvantages of liquidation
- Liquidating a company and starting again
What does liquidation mean?
Liquidation is the process of closing a limited company, selling assets and dissolving the company from the official register.
It is the process that your company faces if you have cash flow problems on a regular basis and creditors are threatening to take enforcement action. A compulsory liquidation is a form of liquidating a company which involves the courts. It happens when a winding-up petition has been issued by a creditor of an insolvent company, due to a debt not being satisfied.
Why might a company go into liquidation?
A company may go into liquidation due to:
- A market decline, where the specific sector is no longer as profitable as when the company was founded;
- Large, repeat customers having themselves gone through an insolvency process;
- Core customers that accounted for large sections of revenue having gone to competitors;
- Unexpected bills that have caused strain on the cash flow of the company;
- A struggle to collect money from debtors to your company who are not paying their bills on time.
How does liquidation work?
The best way to take steps towards the liquidation of a company is to enlist help from an expert Insolvency Practitioner who can explore your full range of financial options and recommend the best fit for you.
When your company enters into liquidation, there are a few main steps that are taken. These steps include:
If the business cannot continue trading, and liquidation is decided as the best option, a creditors’ meeting must be held approximately one month after the company ceases to trade .
At this meeting, the Insolvency Practitioner’s appointment will be confirmed. If you have been invited to attend a creditors’ meeting as a debtor, we would recommend attending. This is when a statement of affairs is presented that details the current financial position of the company and informs all creditors about the liquidation process.
What are the specific duties of Directors during Liquidation?
During voluntary liquidation, company directors have to:
- Provide all information about the company to the liquidator.
- Attend any interview requests with the liquidator.
- Hand over all company assets.
- Allow the liquidator to have access to company books, records, employee records, bank statements, insurance policies and all relevant documents relating to the company’s assets and liabilities.
Once the liquidator has circulated the final report to shareholders and/or creditors, there is an 8-week period for creditors/members to object to the liquidator’s release.
The Liquidation process
The appointed liquidator will begin to try and understand the business in order to identify whether a CVL, an MVL or another process is the most appropriate course of action. If the directors of the business are intent on closing the company, then a Company Liquidation process will likely be the ideal solution.
Once the liquidator is appointed, the powers of the directors cease and the liquidator assumes responsibility over the company’s affairs. It is the responsibility of the liquidator to ensure the best possible result for creditors under the circumstances.
The liquidator will typically go through these initial steps:
- Thorough Investigation– All information is collected and collated promptly, and in a thorough manner. This includes all company books and records, details of company assets, cash and book debts and all non-physical assets.
- Full List of Creditors– The directors must provide a list of creditors, with information on precise money owed, names, addresses and reference numbers.
- Inform Creditors– The insolvency practitioner will then go through the process of informing every creditor listed of the company position – this will be through a formal notice.
- Asset Valuation– All company assets will be valued and then realised for the benefit of creditors. First the costs and expenses of the liquidation are deducted, then voluntary liquidation costs are covered, all other creditors – secured, preferential and unsecured – are then paid in stages until all of the money has been used up.
- Staff Management– The insolvency practitioner is responsible for making staff redundant, assisting with employee claims and investigating the conduct of company directors.
Types of liquidation
The process of business liquidation, whether voluntary or compulsory, is primarily geared around the realisation of company assets for creditors. Depending on the specific situation, your ideal company liquidation process may vary. There are 3 main types of liquidation, these being:
Creditors’ Voluntary Liquidation (CVL)
A CVL takes place when a company is insolvent and no longer has the ability to pay liabilities or continue trading.
It is the directors duty to instruct an insolvency practitioner in this case. Directors then commence a decision-making process to place the company into liquidation and hand over control to a liquidator.
In order to vote for a CVL, the shareholders must hold a general meeting to pass a resolution to wind up the company. At this point, a company can choose to nominate an insolvency practitioner to the role of liquidator. A decision date for creditors should also be called either on or close to the same day as the shareholders’ meeting. This is the time that creditors are given to object to the appointment of the liquidator or request a physical meeting.
Members Voluntary Liquidation (MVL)
This liquidation process is applicable when a company is still solvent and able to trade, yet the directors of the company wish to close the company down.
In this instance, there is enough value left in the remaining assets of the company in order to pay all the debts owed out to creditors, plus statutory interest. An MVL could be used due to the retirement of a director or shareholder, or when a family business has no one to succeed.
In order to begin, the directors of the company must make a formal declaration of solvency. It will:
- Include all relevant and up-to-date company assets and liabilities within a single statement;
- State that all directors of the company have conducted a full and thorough inquiry into the affairs of the company;
- State that directors are happy that the company can repay all debts and interest within a 12-month period.
The declaration of insolvency is filed at Companies House as the company enters liquidation. The shareholders of the company must hold a general meeting where a resolution is passed to begin the process.
Once an MVL is decided upon, the process is much the same as a CVL whereby the appointed liquidator will commence liquidating the company.
This form of liquidating a company involves the courts and happens when a winding-up petition has been issued by a creditor of an insolvent company, as a due debt has not been satisfied.
The petition is subsequently heard at a winding-up hearing and a judge can make a Winding-Up Order to place the company into Compulsory Liquidation. The company is then liquified by an appointed liquidator.
Can My Company Continue to Trade Whilst in Liquidation?
Directors should cease trading as soon as the decision to liquidate the company has been made. If they were found to be trading insolvent, the directors can be found guilty of wrongful trading and become personally liable for some (or all) of the company’s debts. They could also be banned from acting as a director of a company for up to 15 years.
The primary objective of a liquidation is to close down the business and cease trading completely. In most cases, companies will not be given the opportunity to continue trading once the liquidation process has commenced and they are officially in liquidation.
What happens after Liquidation?
Once the company has been liquidated it will no longer exist and therefore, cease to trade. The liquidator must also investigate each of the directors to ensure that any actions during the time the business was insolvent, still met their fiduciary duties.
How long does the liquidation process take?
This is dependent on how your company is being liquidated. If you have gone through the process of speaking to an insolvency company and they are happy with the sufficient amount of evidence you have given, it should take around 3 weeks for full company liquidation.
On the other hand, if at least 90% of the company shareholders have supplied sufficient evidence and everything that is needed to liquidate the company, the company liquidation company will usually process this within 7 days.
How much does liquidation cost?
Understandably, given the financial strain and worry already experienced by those involved with a company facing liquidation, many people are concerned about liquidation costs.
While there is no exact, default figure, it is worth noting that while there is a cost to liquidation – as with any professional service – the cost of a liquidation can often be met through the assets of the business. In many cases, the fee may well be covered through the actual liquidation itself, freeing you from both:
- additional financial pressure and specific costs at present;
- any future financial risk associated with owning a company with mounting debts.
Who Gets Paid First in Liquidation?
The Insolvency Act 1986 set out a clear order of payments that has to be legally followed when a company becomes insolvent and goes into liquidation. The classes are as follows:
Liquidator Costs and Expenses-
Once the assets of a company have been valued and sold, the first cost to be paid are the costs of the liquidation. The fee for the insolvency practitioner acting in the role of liquidator is paid in full, alongside all administrative costs and expenses that have built up during the entire process. These costs and expenses can include:
- Any meetings and travel costs relating to those meetings
- The realisation of assets
- The distribution of funds
- Producing and providing reports and accounts for relevant individuals
- The investigation that will have taken place regarding the conduct of company directors.
It should be noted that these costs and expenses are subject to approval from creditors.
Secured Creditors (Fixed Charge)-
Holders of a fixed charge are usually banks or other lenders who hold a title over specific assets. This is most commonly in the form of a mortgage on a business premises through a bank, but also may be charges over any equipment and machinery.
These can include employees seeking wage arrears and holiday pay. These funds are claimed from the Redundancy Payments Service, who will subsequently submit claims into the liquidator.
Prescribed Part Creditors-
This relates to an amount that is set aside from the company’s net properties. This ensures that unsecured creditors have a better chance of recovering some of the debt that they are due.
Secured Creditors (Floating Charge)-
These are any assets that are not subject to a fixed charge, such as:
- Fixtures and fittings at a premises;
- Any raw materials used in the production process of a company;
- Any work-in progress.
Floating charge assets can be sold and traded during normal business proceedings. The amount leftover once prescribed part creditors have been dealt with is used to repay any floating charge creditors.
- Staff Claims
- Trade Creditors
- HM Revenue and Customs
Advantages and disadvantages of liquidation
By choosing to liquidate your company, you can benefit as a director. It prevents the creditors of the company from incurring more debt and ensures you, as a director, are less likely to be guilty of wrongful trading action being brought against you.
Some of the main advantages of Liquidation are:
- Removes pressure from all creditors.
- Prevents further legal action being taken against you.
- Allows time for the realisation of company assets, ensuring that creditors receive the best possible return in terms of repayment of debt owed.
- Potentially allows the opportunity for directors and/or shareholders to purchase assets at fair value, if they can be used in another business going forward.
- Offers a complete, clean break for directors to move on from the company.
- Employees can submit redundancy pay claims through government schemes.
- As liquidator’s costs are paid once company assets are realised (providing
assets are of sufficient value), there are no other fees directors are liable for.
- Can no longer trade under the same or similar company name after liquidation.
- Once liquidation starts, any trading that is continued with the business may cause you to be prosecuted.
- Business assets, reputation and licenses will be instantly removed from company ownership.
- Can’t recover any tax loss you may have incurred in your trading years.
Liquidating a Company and Starting Again
If you are considering liquidating a company and starting again, there are several issues and complexities that you should consider. The Insolvency Experts can help you to understand exactly what you should expect when your company has gone into liquidation.
It is not uncommon for a company to go into liquidation and close, but for a new legal entity to then be created where the assets of the liquidated company continue. In these cases, the assets may be acquired from the Liquidator at fair value. It is always worth considering all of your available options when looking at liquidating your company and starting again.
What is a Limited Liability Framework?
Liquidating a company and starting again may be seen in cases where a company has been set up as a limited liability. In these situations, the directors of the company are protected from the personal liabilities of the company debts as the insolvency process begins.
A limited liability framework protects those directors who have not failed in their obligations and duties, such as where the company has struggled due to unforeseen circumstances and external factors that the directors had no control over.
Are there limits on starting a new business after liquidation?
The insolvency process prohibits any director that has been part of a liquidated company for 12-months prior to the liquidation process, from undertaking a number of actions.
Over a period of 5 years post-liquidation, directors are unable to:
- Become a director of a company trading under a similar trade and name.
- Form, promote or manage a company under a similarly registered name or trading name.
Any person found to have breached these restrictions will be fined or, in the most serious cases, be given a prison sentence.
Insolvency legislation prevents the re-use of the same name within a new company, but there are a few exceptions to the rule:
Purchase of Business- If a new company purchases the liquidated company, a similar name may be used as long as all stakeholders are notified.
Court Allowance- You can make an application to the courts to use a registered or trading name that is similar to the initial company.
Existing Name- In some cases, a company may have been trading under a ‘prohibited’ name in the 12-months to the build-up to the liquidation process beginning. In these instances, the name can be used as part of a new company.
Can I transfer assets to a new company?
You can transfer assets when liquidating a company and starting again, but only subject to paying fair value for those assets. An independent valuation will ensure that the new company pays a fair price for all assets that are to be transferred, with funds being passed to the Liquidator for the benefit of the Liquidation estate.
Here at The Insolvency Experts, we have helped a variety of clients around the UK to complete their company liquidation in the way which best protected their financial interests. If you are looking to liquidate a company and require expert advice on the best way to go about it, we would love to speak to you today.
Fill out our online form, email us on firstname.lastname@example.org or call us on 01204 208 161 today to discuss your liquidation options further.