Company Liquidation: Trust Liquidators UK for your Business

What does liquidation mean?

Liquidation is the insolvency procedure for closing down a company and distributing its assets to creditors or shareholders. Liquidation is frequently a last resort used when a company is insolvent and unable to pay its debts as they fall due. A solvent company can also enter into voluntary liquidation where it is solvent and shareholders wish to wind up the company.

Types of Company Liquidation

There are three main types of company liquidation in the UK:

• Creditors’ Voluntary Liquidation (CVL)

• Compulsory liquidation

• Members’ Voluntary Liquidation (MVL)

Creditors’ Voluntary Liquidation (CVL)

A creditors’ voluntary liquidation is initiated by the directors of a company when they believe the company is insolvent and cannot continue trading. The directors must arrange for a special resolution to wind up the company to be passed by shareholders and for a report and statement of affairs to be issued with notices to creditors. The liquidator’s appointment is confirmed by the creditors and they work to realise the company's assets, agree with creditor claims, and make distributions to the creditors.

Where there are insufficient asset realisations to pay unsecured debts, they are written off. Directors could be personally liable to pay the shortfall to certain creditors if they have provided personal guarantees.

Creditors’ voluntary liquidations are generally viewed as a responsible and proactive approach by the company’s directors, who recognise the company’s insolvency and choose to act in the best interests of the creditors.

Compulsory liquidation

A compulsory liquidation is initiated by a court order following a petition from a creditor or shareholders. This happens when the company is unable to pay its debts as they fall due or it is just and equitable to wind up the company. Any creditor owed at least £750 can petition for compulsory winding up. HMRC frequently petitions.

This insolvency is administered by the Official Receiver or court-appointed liquidator.

The process is not in any way voluntary for directors.

Members’ Voluntary Liquidation (MVL)

A members’ voluntary liquidation is a type of liquidation process initiated voluntarily by the shareholders of a solvent company to wind up its affairs and distribute its assets to the shareholders. This type of voluntary liquidation is often used when the shareholders of a company decide to retire or move on to other ventures and wish to distribute the assets of the company among themselves. The directors must swear a declaration of solvency stating that the debts can be paid within 12 months. They will pass a resolution to wind up the company and call a meeting of shareholders. The liquidator is appointed by the shareholders and works to realise the company's assets and distribute them to the shareholders.

What are the main Advantages and Disadvantages of Liquidation?

Advantages of Liquidation

• Provides a clear and final solution to the financial difficulties of a company.

• Allows the assets of the company to be sold to repay creditors.

• Provides closure for the company's directors and shareholders.

• Can be a more appropriate option for companies with no realistic prospect of recovery.

• Can provide an opportunity to start a new business without the burden of old debts.

Disadvantages of Liquidation

• Can be a lengthy and costly process, especially if there are many creditors or assets to be sold.

• Can lead to job losses for employees and disruption to the business community.

• Can result in personal liability for the company's debts for the directors.

• May not result in the best outcome for all creditors.

• Can result in the loss of the company's reputation and goodwill.

 It's important to note that the advantages and disadvantages of liquidation can vary depending on the specific circumstances of the company and the type of liquidation being undertaken. It's recommended to seek professional advice before making a decision about liquidation.

The liquidation process in the UK

The process of liquidation involves several stages:

1. Appointment of a liquidator – The liquidator is appointed by either the directors, creditors, shareholders, or court depending on the type of liquidation.

2. Realisation of assets – The liquidator collects and sells the company's assets to raise money to pay creditors.

3. Payment of creditors – The liquidator distributes the money raised from the sale of assets to creditors in order of priority.

4. Dissolution – The company is removed from the Companies House register and ceases to exist.

The liquidation process can take several months or even years, depending on the complexity of the case, the amount of assets to be sold, and the number of creditors.

Who gets paid when a company goes into liquidation?

When a company goes into liquidation, the proceeds from the sale of its assets are used to pay its creditors in a specific order of priority. Here's who gets paid when a company goes into liquidation:

When a company goes into liquidation, the proceeds from the sale of its assets are used to pay its creditors in a specific order of priority. Here's who gets paid when a company goes into liquidation:

Secured creditors:

Secured creditors are those who have a legal charge over the company's assets, such as a bank. They have the first claim on the proceeds from the sale of the secured assets.

Preferential creditors:

Preferential creditors are those who are given priority by law, such as employees who are owed wages or holiday pay. They have the next claim on the remaining funds after the secured creditors have been paid.

Secondary preferential creditors:

From 1 December 2020 HMRC were granted secondary preferential creditor status in respect of specific crown liabilities which are as follows

·        Value Added Tax (VAT

·        Pay as You Earn (PAYE) Income Tax

·        Employee National Insurance Contributions

·        Students Loan Repayments

·        Construction Industry Scheme deductions

Secured creditors with a floating charge, and the ‘prescribed part’. 

These creditors have security over a particular asset class, such as stock or work-in-progress.  This sum is called the ‘prescribed part’ and applies to assets with a floating charge taken out after 15th September 2003. The prescribed part consists of 50% of the first £10,000 received from the sale of assets with a floating charge, and a further 20% between £10,000 and £600,000 of realisations.

Unsecured creditors:

Unsecured creditors are those who do not have a fixed or floating charge over the company's assets, such as suppliers, customers, and contractors. They are paid from any remaining funds after the secured and preferential creditors have been paid.

Shareholders:

Shareholders are the last in line to be paid and are only entitled to any remaining funds after all creditors have been paid in full.

It's important to note that not all creditors may be paid in full during the liquidation process, especially if there are limited funds available. The liquidator must distribute the funds fairly and impartially among the creditors in accordance with the order of priority. If there are insufficient funds to pay all creditors, unsecured creditors may receive only a proportion of the debt owed to them or none at all.

Factors to consider before opting for liquidation

Directors should consider the following factors before opting for liquidation:

• The impact on employees, creditors, and shareholders

• The costs and time involved in the liquidation process

• The potential for personal liability for the company's debts

• The possibility of a better outcome for creditors through an alternative process, such as a Company Voluntary Arrangement (CVA)

It's important to seek professional advice before making a decision about liquidation.

Can I liquidate a company myself?

No, a company cannot be liquidated by its directors or shareholders. An insolvency practitioner (IP) must act as the liquidator. The IP must be licensed by a recognized professional body and have sufficient experience and qualifications to carry out the role.

How long does it take to liquidate a company in the UK?

The time it takes to liquidate depends on the complexity of the case, the amount of assets to be sold, and the number of creditors. It can take anywhere from a few months to several years. The liquidator must notify all known creditors of the liquidation, seek out, and agree their claims. The creditors have a set period to submit their claims to the liquidator, and the liquidator must verify and agree on the claims before distributing the assets.

Directors’ liabilities and obligations: legal consequences of liquidation

Directors have certain liabilities and obligations when a company is liquidated:

Directors Role in the Liquidation

Directors have a duty to cooperate with the liquidator and provide them with information about the company's affairs. They must also attend meetings and respond to queries from the liquidator. The liquidator has the power to investigate the conduct of the directors and report any misconduct to the relevant authorities.

Wrongful Trading

If a director continues to trade when they knew or ought to have known that the company was insolvent, they may be held personally liable for the company's debts incurred during that period. The liquidator can apply to the court for a declaration of wrongful trading, and the director can face disqualification and personal liability for the debts incurred.

Personal Guarantees

Directors may have given personal guarantees for the company's debts, which means they are personally liable for those debts if the company cannot pay them. Creditors can enforce these guarantees and recover the shortfall on these debts from the directors personally.

The role of an insolvency practitioner (IP) in the process of liquidation

An IP is a licensed professional who acts as the liquidator in a company liquidation. Their role includes:

• Investigating the company's affairs to identify the causes of insolvency and possible misconduct

• Collecting and realising the company's assets to raise money to pay creditors

• Distributing the proceeds to creditors in order of priority

• Reporting to the relevant authorities, such as the Insolvency Service and the court, on the conduct of the directors and the outcome of the liquidation.

The IP must act impartially and in the best interests of all creditors, and they have the power to investigate the conduct of the directors and report any misconduct to the relevant authorities.

Alternatives to company liquidation

There are alternatives to liquidation that may be more appropriate depending on the circumstances:

Dissolution

If a company has no assets or liabilities, it can be struck off the Companies House register via dissolution. This process is simpler and less costly than liquidation, but it cannot be used if the company has outstanding debts or legal claims against it.

Company Voluntary Arrangements (CVA)

A CVA is an agreement between a company and its creditors to repay debts over a period of time, allowing the company to continue trading. The company must have a viable business plan and be able to generate sufficient cash flow to repay the debts. A CVA can be a cost-effective and less disruptive way to deal with financial difficulties and avoid liquidation.

Summary

Company liquidation is a complex and potentially costly process that should only be considered as a last resort. There are three main types of liquidation, and each has its own procedure and requirements. Directors have certain liabilities and obligations during the liquidation process and can face personal liability for the company's debts if they breach their duties. It's important to seek professional advice before making a decision about liquidation and consider alternative options, such as dissolution or a Company Voluntary Arrangement.