Company Liquidation - What You Need to Know
When the time comes to close down a company with unsettled financial obligations, Company Liquidation is an effective solution. This process can be done voluntarily when instructed by the directors and shareholders in the form of Creditors Voluntary Liquidation (CVL). On the other hand, if one or more creditors wish to initiate compulsory liquidation, they may petition for winding up from court. A licensed insolvency practitioner will act as liquidator in order to sell off assets so that funds may be distributed among all creditors involved.
This guide will investigate the three prime forms of liquidation and how it is conducted. We'll further explain both the advantages and drawbacks that come along with voluntary liquidation, in addition to discussing its effects on directors, employees, and even if there's money involved or not. By understanding all aspects associated with a business being wound up, you can make an informed decision about your next course of action.
Call Company Doctor on 0113 237 9503 for a no obligations chat with our own licensed insolvency practitioner if you are looking to close your business. Our insolvency experts can offer provide professional and confidential advice on your liquidation options.
What does company liquidation mean?
As detailed above, liquidation is a formal insolvency procedure. It requires the appointment of a licensed insolvency practitioner in the role of liquidator. They will oversee the sale of all the company assets which are then used to repay the outstanding creditors and other obligations. The company can then be dissolved and will cease to exist as a legal entity with any surplus funds paid back to shareholders.
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Company Liquidation - Common Questions
Why would a company go into liquidation?
There are several reasons why a limited company may wish to enter into liquidation, including:
- Insolvency: This is when a business cannot maintain its contractual creditor repayments when they fall due or, the liabilities are higher then the amount of company assets in the business.
- Decline in Business: This is when levels of trade are in decline and the current financial position of the business becomes increasingly strained with no immediate prospect of recovery.
- Mergers & Acquisitions: In the event of a company acquisition or when a company merges with another, the old company is liquidated and its assets are sold to another company.
- Retirement of the Owner: Directors of solvent companies can enter a Members Voluntary Liquidation to close the business and cash in on its assets.
How does a Creditors Voluntary Liquidation (CVL) work?
The voluntary liquidation process typically involves the following steps:
- Appointing a Liquidator: An authorised insolvency practitioner is appointed as liquidator to oversee and manage the process.
- Selling the Company Assets: The liquidator will deal with the sale of all the company assets. They may instruct a specialist agent to find a company or individuals that are looking to purchase assets of the business to achieve the best possible price.
- Paying the Debts: After authorised costs, the liquidator will distribute the proceeds from the sale of the assets to pay off the company's debts, including its outstanding loans, HMRC liabilities and employee claims etc.
- Distributing the Remaining Assets: Any remaining assets after the debts have been paid will be distributes to the company's shareholders.
For further information, please read our Guide on Creditor Voluntary Liquidation.
What are the 3 types of company liquidation?
There are three main types of liquidation:
- Creditors Voluntary Liquidation (CVL): When a company is deemed to be insolvent, company directors can start the formal process of a Creditors Voluntary Liquidation. To begin, directors of the company must gain approval from 75% majority of shareholders at an extraordinary general meeting. This decision signifies that liquidation has commenced and creditors will be invited to make claims against what remains outstanding in order for funds to be distributed fairly.
- Members Voluntary Liquidation (MVL): If a solvent company is considering closure, they may opt to enter voluntary liquidation through an MVL. This process must be approved at a shareholders meeting by 75% majority approval from shareholders. This option minimises tax liabilities during closure as capital gains taxes are paid at 10% rather than higher income tax rates. Read our guide to Members Voluntary Liquidation here.
- Compulsory Liquidation: When creditors are unable to receive payments from a limited company, they can petition the courts for compulsory liquidation. This is often initiated by HM Revenue & Customs when tax has not been paid on time. Compulsory liquidation is an intensive compulsory process that leads to dissolution of the business and distribution of its assets among creditors.
What is the procedure in a voluntary liquidation?
The procedure for both CVLs and MVLs involves the following steps:
- Appointment of a Liquidator: In the event of a company insolvency, directors and shareholders should instruct an insolvency practitioner as liquidator to oversee proceedings.
- Passing a Resolution: At a shareholders meeting, the limited company's directors and shareholders will pass a special resolution in order to voluntarily close down the business. Afterward, they must file this resolution with Companies House.
- Notification to Creditors: A creditors meeting is convened with a report issued to creditors providing details of assets and a likely breakdown of how much they are likely to receive.
- Asset Realisation: The liquidator will deal with the sale of all the company assets and distribute the funds amongst the company's creditors.
- Final Accounts: Finally, the liquidator will issue a final report detailing all the company's asset sales and liabilities to Companies House.
What is the procedure in a compulsory liquidation?
The procedure for compulsory liquidation involves the following steps:
- Issuing a Winding Up Petition: If a limited company is unable to pay off its debts within 21 days, the creditor has the authority to issue a statutory demand and then petition for Winding Up with their local court. In addition, HM Revenue & Customs may initiate these petitions if they discover that business taxes are not up-to-date.
- Appointment of an Official Receiver: Filing a Winding Up Petition with the court begins the compulsory liquidation process, whereby an appointed Official Receiver assesses and asll aspects of the company such as assets, liabilities and management to report back to the court.
- Court Hearing: A court hearing is set to decide whether the business should be placed into liquidation. The directors, shareholders, and creditors of the company will all receive notice regarding this hearing and are invited to attend in order to make their claims heard.
- Winding Up Order: In the event that a court decides to dissolve the company, it will issue an Order for the company to be wound up. Control of the company's affairs are passed over to the liquidator who is responsible for realising all company assets owned by said firm in order to pay off creditors and other liabilities.
For further information, please see our guide to Compulsory Liquidation.
What are the main advantages & disadvantages of Creditors Voluntary Liquidation (CVL)?
Company Liquidation - Advantages & Disadvantages
Advantages of Creditors Voluntary Liquidation
- Debt relief: When a limited company is struggling with its financial obligations, a Creditors Voluntary Liquidation serves as the perfect solution. The process not only offers relief from ongoing cash flow issues but provides directors with the opportunity to make a fresh start as company debts are written off once the liquidation has concluded.
- Creditor protection: A Creditors Voluntary Liquidation ensures creditors that company assets will be sold under the professional management of a liquidator and the proceeds distributed to creditors.
- Avoidance of compulsory liquidation: By selecting an insolvency practitioner for a Creditors Voluntary Liquidation, directors are able to take charge of the liquidation process and gain access to more cost-effective solutions than compulsory winding up which is generally more expensive and can be more intrusive.
- Staff members can claim redundancy pay: The liquidator will make any remaining staff redundant and they will then be in a position to start a claim for redundancy pay and other statutory entitlements.
Disadvantages of Creditors Voluntary Liquidation
- Damage to reputation: If a company and its directors have built up an impressive brand image and trading history, a CVL may undermine their reputation and could initially make it difficult for the director to launch another business.
- Loss of control: As soon as a CVL is underway, directors lose control of the business. This can be quite disheartening for those who want to remain more active in the process.
- Reduced returns for shareholders: By participating in a Company Voluntary Liquidation (CVL), shareholders will likely not receive any returns, as their shares become worthless when the company is dissolved.
- Cost: Dissolving a company through CVL can be costly, especially when the business is big and complex. Professional fees incurred during liquidation for realising assets can quickly accumulate, leaving creditors with drastically reduced repayment amounts.
Prior to making any crucial decisions, you should seriously consider the pros and cons of a Creditors Voluntary Liquidation. This approach can provide numerous advantages for companies in financial difficulty. Nonetheless, all elements must be carefully evaluated so that you feel totally confident about your choice.
Directors should seek the advice of a licensed insolvency practitioner who can provide guidance on all the implications of a creditors voluntary liquidation. They will assess your company's circumstances so that you can make an informed decision that is best suited to your business.
Can my company continue to trade during liquidation?
No, When a company enters liquidation, it must cease trading immediately. An insolvency practitioner is appointed to manage this transition. They will be responsible for selling off assets in order to pay back creditors.
Can I Liquidate my Company Myself?
No. You require the services of an Insolvency Practitioner. Navigating the liquidation process is complicated, and it's up to an insolvency practitioner to guarantee that everything is done accurately and legally.
Can I liquidate my company if it has a Bounce Back Loan?
If your business is insolvent and you have an outstanding Bounce Back Loan, liquidation is your only option. This is because of the government's zero tolerance policy to companies attempting strike off with an outstanding BBL.
All applications to strike off are automatically rejected and Companies House will suspend the application leaving you with the option of a Creditors Voluntary Liquidation or compulsory winding up by one of the creditors.
Bounce Back Loans are treated exactly the same as other unsecured creditors during the liquidation process.
What happens to my Director’s Loan Account (DLA) in a company liquidation?
As a company director, it is essential that you accurately maintain an up-to-date Director's Loan Account (DLA) to comply with legal requirements. The DLA carefully documents all transactions between yourself and the business in order for your activities to be monitored properly.
During a liquidation, the DLA balance will determine what occurs next. If there is a credit balance, the director can make a claim in the liquidation and may receive payment from any proceeds after asset sales. On other hand, if there's a negative balance, then this amount must be paid back to the appointed liquidator as it is regarded as part of the company’s assets.
What are the duties of directors of an insolvent company?
When a business is experiencing financial difficulty, the directors of the company have key tasks and duties to fulfill. According to The Companies Act 2006 and Insolvency Act 1986 in the UK, here are some of their primary responsibilities as company directors for an insolvent firm:
Duty to Avoid Trading While Insolvent
- Directors must cease trading if they know, or ought to know, that the company is insolvent. This is known as wrongful trading.
- Directors could be held personally liable for debts if found to have engaged in wrongful trading.
Duty to File for Insolvency
- An insolvent company should seek to enter insolvency if it us unable to repay its debts when they fall due.
- This involves filing for either a winding-up order or entering into a company voluntary arrangement (CVA).
- Failing to take this step when required can result in directors being held personally liable for its debts.
Duty to Act in the Best Interests of Creditors
- Directors have an obligation to act in the interest of the company's creditors, not shareholders or themselves.
- Any decisions taken by a company director need to safeguard creditors' interests over the interests of shareholders.
- Directors can be held personally liable for company debts if they fail to prioritise the needs of the creditors.
Duty to Cooperate with Insolvency Practitioners
- Once a company enters into liquidation, the directors are required to respond to all requests made by the liquidator in a timely manner.
- All requests for company information and documentation such as the books and records should be dealt with promptly.
- Company Directors that fail to response or deliberately withhold vital information could be face an adverse report being issued to Companies House.
Duty to Disclose Wrongdoing
- Company directors must disclose any wrongdoings or breaches of their fiduciary duties, such as mismanagement or fraud, to the liquidator.
- Failure to disclose any incidents of wrongdoing such as wrongful trading or disposing of a company's assets at an undervalue can result in criminal proceedings being issued against the directors.
It is important for directors to seek legal advice from an insolvency practitioner to understand their duties and obligations. This will help to ensure that they fulfil their responsibilities and avoid any personal liability for the debts of the company.
For more information on Wrongful Trading, read our article What is Wrongful Trading? Does it affect me?
What Happens to a Director after the company has been dissolved?
Once the company has been dissolved, the directors obligations to the company's debts and the liquidator end. However, if evidence of misconduct is found, directors can still be accountable.
Are directors liable for company debts?
There are two scenarios in which directors can be held liable personally. Firstly, if the director has signed a personal guarantee for any debt, they will remain liable for this debt even once the company has been liquidated. Secondly, if the director has acted improperly such as trading wile insolvent, or re-using the company name, they can also remain liable for the debts.
Can you be a director again after company liquidation?
Yes, you can become a director once more after liquidation. Yet keep in mind that being the director of a company that has been dissolved may hinder your prospects to be chosen as one again in the future due to its potential negative impact on the perception of your business acumen.
Does a company liquidation affect you personally?
Company liquidation should not affect your personal credit record in any way However, it may harm the reputation of directors and initially make it more difficult to secure a new job as a director elsewhere. Shareholders can lose their investments if there aren't enough resources available to pay off all debts and obligations belonging to the corporation.
What Happens After Liquidation?
Company Liquidation - Closure & Dissolution
Once the liquidation has completed, the company will cease to exist as a legal entity. The appointed insolvency practitioner will issue the final report to Companies House and its details will then be removed from the register of companies.
Who pays for a company liquidation?
The costs of the liquidation are generally covered by the company's assets, the sale of which will be handled by the liquidator. The remaining funds will be then distributed amongst the company's creditors and any surplus funds held paid to the shareholders.
How Much Does it Cost to Liquidate a Company?
The cost of liquidating a company can be expensive, ranging from ja few thousand pounds to tens of thousands for more complicated scenarios. This largely depends on the size and type of business being closed down. On average, expect to pay several thousand pounds in order to ensure a smooth dissolution process.
How do I liquidate a company with no money?
If a company is struggling financially, voluntary liquidation may be out of reach. However, the directors are able to contribute funds from their own resources or third party sources in order to proceed with the process.
How Long Does it Take to Liquidate a Company?
The process of liquidating a company can take as little as a few months for straight forward cases up to more than a year for larger more complex companies that have many assets, multiple properties and issues such as employees to deal with.
How Does Liquidation Affect Employees?
Liquidation is a drastic process that can have tremendous repercussions for employees. The company will cease to exist, resulting in the termination of all staff positions. To cover debts and liabilities, the liquidator will sell off all company assets. Employees can submit claims to the liquidator for unpaid wages and rank as a preferential creditor.
Ex-employees have special priorities when it comes to liquidation, and may also be eligible for redundancy benefits through the Redundancy Payments Service.
Further information on what happens to employees of an insolvent company including advice on how to claim redundancy can be viewed HERE.
Who gets paid first in Liquidation?
The Insolvency Act 1986 provides an established order for creditors to be addressed during a company's insolvent liquidation in the UK. To make it easier, here is a helpful guide so you can determine who should receive payment first.
Creditor Payment Hierarchy
- Secured creditors with a fixed charge
- Administrator/Liquidator fees
- Preferential creditors (such as employee claims)
- Secondary preferential creditors (including specified HMRC debts)
- Secured creditors with a floating charge
- Unsecured creditors including trade creditors that have no security
Secured Creditors with a Fixed Charge
It is essential to keep in mind that when you have assets such as property, plants, machinery or vehicles that are subject to a fixed charge held by banks and other asset-based lenders, your rights to sell or trade them may be forfeited. In the event of liquidation proceedings, these secured creditors/liquidators can sometimes be given permission to sell those assets so they could raise funds - depending on what was agreed initially.
Preferential creditors include employees who are entitled to arrears of wages up to a maximum of £800, and holiday pay.
Secondary Preferential Creditors
On the 1st of December, 2020, new legislation promoted HMRC from an unsecured creditor to a secondary preferential one. This covers all of the following HMRC debts:
- Value Added Tax (VAT)
- Pay As You Earn (PAYE) Income Tax
- Employee National Insurance contributions (NICs)
- Student loan repayments
- Construction Industry Scheme deductions
If your business has gone into insolvency after the 1st of December 2020, any debts incurred prior to that date must be repaid in full once all secured and preferential debts have been repaid.
Secured Creditors with a Floating Charge
This can include, but is not limited to, the company's assets such as stock and materials, fixtures & fittings and machinery etc. Creditors that hold floating charges are given given priority above unsecured creditors during the distribution of funds in accordance with the Prescribed Parts legislation.
The Prescribed Parts legislation has meant that since September 2003, some of the proceeds from the sale of these assets is set-aside for the benefit of unsecured creditors.
Creditors in this class comprise of those that hold no form of security and do not have preferential status such as bank loans, credit cards and loans from individuals such as family members or friends. If there is a credit balance on the Directors Loan Account, this will also rank along other unsecured creditors.
Shareholders are the lowest rank when it comes to the distribution of funds in a liquidation. In the event that all classes of creditors are paid in full, the any remaining surplus funds held will be paid to the company's shareholders.
Can I start another company after liquidation?
Despite liquidating a company, it is still possible for a director to establish and launch another. To ensure proper compliance with current regulations as well as carry out any requests made by the liquidator. Be sure to respond promptly to all inquiries throughout the process. In addition, make certain that your new enterprise does not share its name with one previously dissolved in order to avoid confusion or potential legal liabilities.
Are there restrictions on re-use of names following liquidation?
It is absolutely forbidden to continue operating under the company name after it has been liquidated, and there can be serious repercussions for any director convicted of such activity. Fines or imprisonment may await those found guilty, and directors could also face financial responsibility for legal liabilities incurred by the dissolved corporation.
There are 3 exceptions that allow the use of a previous company name with the main one being the utilisaton of a pre-pack liquidation which allows for the name to be used again in the form o a phoenix company. An application can also be made to the court to enable the re-use of an old company name. Finally, the name can be used again if it is already in use by another company or group of companies.
Directors should consult with a licensed insolvency practitioner before making any final decisions on using a prohibited name.
What is the final step of company liquidation?
Once Companies House has received the final liquidation report and all necessary paperwork, your business will enter dissolution. After it's officially removed from their database, you can say goodbye to this legal entity - concluding its liquidation period with a formal farewell!
Company Liquidation - A Summary
Charting the course of a company liquidation is an intricate and complex process, with potential repercussions that can affect everyone from directors and shareholders to employees and creditors.
If you're considering liquidating your business, both directors and shareholders should understand the potential repercussions of this process. To better prepare for what lies ahead, it's imperative to seek advice from an insolvency practitioner. This will help ensure that the dissolution of your company is handled in an organised manner with minimal risk and maximum benefit.
Investing time to thoroughly grasp the liquidation process and its potential repercussions makes sure that it is done appropriately, openly, and ethically. This guarantees compliance with applicable laws.
Contact us regarding company liquidation options
Here at Company Doctor, our licensed insolvency practitioner and team of insolvency experts have helped lots of company directors around the UK to complete their company voluntary liquidation process in a way which best protects their financial interests.
If you are considering a Creditors Voluntary Liquidation (CVL) and require expert advice from a licensed insolvency practitioner, we would be happy to discuss this with you on a completely no obligation and confidential basis.
We can help you close your company in an orderly manner using the most appropriate course of action for your company. We can also provide advice on director redundancy and whether you are able to claim for director redundancy pay.
Fill out our online form, email us on email@example.com or call us on 0113 237 9503 today to discuss your voluntary liquidation options with one of our insolvency experts today.
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Should a company owe a creditor, the creditor possesses the right to submit a winding-up petition. In the event that the company's directors fail to respond promptly, this petition could trigger compulsory liquidation of the company.
In specific circumstances, a company director may be personally responsible for their company's debts. If any of the company's debts have been underwritten with a personal guarantee, the director will be required to repay them in the event that the company becomes insolvent and enters into liquidation.
Upon the dissolution of a company, the directors are relieved of their obligations related to the firm's management and administration. They will no longer participate in meetings, make executive decisions or carry out any other responsibilities associated with the company.
A company director, even in a situation where the company is undergoing liquidation, maintains the right to step down from their role at any given time. Nonetheless, even after their resignation, the director could potentially be held liable for their conduct during their time as director of the liquidated company.
Further Reading on Liquidation
Our licensed insolvency practitioners will guide you to the right solution, whatever your financial situation may be.
Cant Repay Bounce Back Loan or CBILS
Contact us for advice if you are unable to repay funding received, including Furlough, CBILS, CLBILS, BBLS and (SEISS).
Company dissolution (striking off), is the process of shutting down a limited company.
Winding Up Petitions
We can help if your business may be put into compulsory liquidation, or you have received a winding up petition.
Time To Pay Arrangement
We can find the best solutions and negotiate Time To Pay Arrangements on your behalf.
Directors Redundancy Claims
Did you know that many company directors are entitled to redundancy payments if the company is liquidated?