calculator with bills

What is Liquidation?

In short, Liquidation is when a company is formally closed via the ‘Formal Insolvency Procedure’. In order to begin this process companies are required to appoint a licensed and registered insolvency practitioner. These practitioners are also referred to as Liquidators or the abbreviated form IP, so look out for these terms when exploring this option.

How does Liquidation eliminate debt?

During the liquidation process, all business assets are sold or ‘liquidated’ with any and all revenue generated contributing to debt repayments.
This is done by calculating the arrears and distributing shares of this revenue to creditors in priority order.

Liquidation: What Happens?

Liquidation is typically considered in two instances; ‘Winding Up’, which is where a Director voluntarily shuts down their business or where businesses are forced to enter liquidation proceedings due to debt. It’s important as a business that you understand the process and your options to assess its suitability to your situation.

In all instances, Liquidation guarantees that a company ceases trade or exist as a legal entity. This involves the termination of all staff, all directors and all business registered bank accounts.

During this process all Directors lose any powers associated with the company and surrender all access to any business bank accounts.

In Insolvency cases, a liquidator or IP (Insolvency Practitioner) is appointed to manage proceedings. The IP will orchestrate the liquidation of all assets and assist in the distribution to the company’s creditors, assessing the priority of each debt.

The final stage sees the company removed from the register at Companies House, in a process called ‘Striking Off’.

Do I have to appoint an IP/Liquidator for my case?

In short, yes.

An IP is certainly a valuable resource for companies to utilise during Liquidations.

A liquidator/IP ensures that all legal obligations and practices are adhered to throughout the liquidation process. A company with assets amassing over £25,000 cannot attempt a Liquidation themselves they must appoint a registered practitioner to ensure that all assets are evaluated and distributed fairly aligned with the circumstances of the case. Liquidators are also responsible for the assessment of Director behaviour, analysing the reason for Liquidation and identifying and reporting any instances of wrongful trading.

It is understandable that Directors and Shareholders may be concerned with the financial obligations of paying for the Liquidation process. Particularly if financial uncertainty has caused the liquidation itself. It is helpful to understand that more often than not any Liquidation fees are factored into the evaluation of assets and can be paid for using assets realised during the process.

What are the Options?

A company can pursue Liquidation in three ways.

Two methods which are considered voluntary and one which is compulsory. For obvious reasons, one or more methods may apply to companies dependent on the circumstances of their liquidation. However, ALL methods necessitate a liquidator to assist the process.

Voluntary Liquidation Procedures

There are two types of Voluntary Liquidation: Creditors Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL). Although different, these proceedings are both initiated by company shareholders and/or Directors.

Compulsory Liquidation Procedures

There is only one option for Compulsory Liquidation. This is a product of court orders from creditors such as HMRC or initiated when a business cannot uphold its financial obligations and pay remaining debts.

Let’s break these down further.

Voluntary Liquidation of an Insolvent Company

This option allows struggling companies a somewhat ‘safe exit’. If a company Director or its shareholders have established an inevitable break down, they can initiate a Creditors’ Voluntary Liquidation (CVL)

This process dissolves the company entirely, selling off any company assets and distributing the revenue from this amongst any creditors. The benefit of this being that Directors are able to rectify the company debts that are not personally guaranteed.

If your company has financial obligations it cannot afford to pay, a CVL may be a beneficial option. It allows directors a route out of the company and its pressures, while also fully addressing company debt.

CVL is best considered a last resort, but if you feel this process is suited to your business position get in touch with our team today to discuss appropriate options and routes.

Voluntary Liquidation of a Solvent Company

If Directors wish to voluntarily shut down a company as part of their exit strategy, a Member’s Voluntary Liquidation (MVL) is the most suitable method of doing so.

To proceed with a MVL, all Company Directors must declare that any outstanding company debts have been paid, meaning the company has no remaining creditors. In doing so, it is important for the Company Directors to ensure all final payments to HMRC have been paid, including VAT or PAYE payments.

All company assets will be processed by the appointment IP and distributed fairly before dissolution of the company.

Compulsory Liquidation

If a company has continuously failed to make payments to a creditor(s), a Compulsory Liquidation can be initiated via a court order.

The first step in this process is often the receipt of a Winding Up Petition. A document sent by creditors in response to numerous or continual late payments (in accordance with the Insolvency Act of 1986 and the Insolvency Rules (England and Wales) 2016), signalling the beginning of Compulsory Liquidation proceedings. Once this petition progresses into court, it often transitions into a Winding Up Order.

The court ordered nature of this process differentiates a Compulsory Liquidation from the Voluntary examples discussed. Upon transitioning into a Winding Up Order, the remaining stages within the process are managed by the appointed Liquidator for this case.

Action and time are a company’s biggest strengths during this process, preventing any potential misconduct and the severe legal repercussions this can entail. If a company is struggling to pay creditors and has been issued a formal threat, it is important to reach out immediately. The behaviour of the company and all Directors is monitored and disclosed to appropriate bodies within the UK government, meaning failure to comply or any avoidance of this situation can have serious legal repercussions for all involved.

We are here to help you, particularly during such complex and troubling times. If you are concerned about formal notices or threatening letters from creditors, speak to us immediately. We handle all consultations with total confidentiality and professionalism, easing the stress of navigating these situations alone and offering expert advice straight away.

What can I expect?

Voluntary Liquidation and the options this provides mean that like many legal proceedings, the process can vary from case to case. However, ALL cases of Voluntary Liquidation are inclusive of several key phases.

Phase 1: Voluntary Liquidation is initiated, and an IP or Liquidator is appointed to manage proceedings.

Phase 2: All Trading ceases and all Director powers are terminated immediately. The appointed IP takes charge of all company accounts and affairs.

Phase 3: The IP/Liquidator evaluates the existing company assets and these are then liquidated. 

Phase 4: Any assets realised are then distributed amongst the remaining creditors, within order of priority.

Phase 5: Should there be remaining funds after payment, these are shared amongst the company shareholders.

Final Stage: The company is officially dissolved and struck off the Companies House Registrar of Companies.

How Long Does Liquidation Take?

Well, how long is a piece of string? There is no correct answer unfortunately.

The type of Liquidation will inevitably affect timeframes, with compulsory and voluntary Liquidations coming with their own procedures and requirements which may produce roadblocks until resolved.

The good news, is that once the process has been initiated the Liquidator/IP begins work immediately, assessing assets and managing the liquidation process. Providing the Liquidator has all relevant information and documentation to do their job effectively without complication the Liquidation can be completed in as little as 4 weeks.

What Time Sensitive Factors Should I Consider?

There are certain legal factors which influence the length of certain Liquidation cases. The following are associated with Compulsory Liquidation Cases, where legal action may be necessary, thus affecting overall completion times.

Statutory Demands: Upon receipt of this notice the company has a maximum of 21 days to settle any outstanding arrears.

Winding Up Petition: Once this 21-day period has been exceeded with no action, the creditor will likely apply for a Court ordered Winding Up Petition. This is where timing can begin to fluctuate. These hearings can be processed by the court in a matter of days or sometimes weeks, depending on their schedule of arrangements and availability.

Wind Up Hearing: When a date is actioned for this hearing the relevant business will receive notice a minimum of 14 days in advance. This will affect the timeframe as hearings cannot go ahead prior to this 14-day notice period.

What are the Responsibilities of a Liquidator/IP?

As a licensed expert, the Liquidator/IP will be duly responsible for several elements within the overall process.

Although impartial in their position, the IP will recognise the individual circumstances associated with the case and take these into account, acting on these accordingly.

The key responsibilities of the Liquidator are:

Statement of Affairs: A document which discloses the company journey and financial position in greater detail. Working with the co-operation of company Directors the business will be assessed financially to define its position upon entering the Liquidation process.

Asset Distribution: It is the responsibility of the IP to assess, liquidate and re-distribute the revenue from the liquidation amongst the outstanding creditors. During the process they will establish a hierarchy of priority, distributing the fund accordingly.

What are the Risks?

As a Company Director, it is important to realise and recognise the risks and how to manage these effectively.

Director responsibilities and the actions associated with these will change greatly once the company has reached insolvency. It is their duty to demonstrate that they have acted responsibly with consideration for the company and its creditors. If professional guidance is not actioned at the appropriate time, the Directors risk making themselves personally liable for the outstanding arrears, as well as any legal action taken as a result of this. It is important for Directors to seek guidance immediately if in this position.

Once the IP has taken command of the case, they are duty bound to investigate the situation and any actions taken by the Directors prior to Liquidation. Ensuring that these actions are responsible and appropriate. Should the Director be found to have acted inappropriately by not taking the required actions they may be liable for charges of fraudulent trading. This makes its incredibly important to take immediate action if a business finds itself unable to settle arrears.

Will I be Declared ‘Bankrupt’?

In short, no.

Liquidation and Bankruptcy are two separate declarations and processes.

Liquidation applies to a company realising its assets involuntarily in order to pay creditors or voluntarily to access and distribute cash and assets amongst the shareholders or directors.

Bankruptcy refers to the financial status of individuals such as sole traders. This can also refer to members within a specific company, but this term does not relate to the company itself.

What if a Company has no Assets?

It is uncommon but not unheard of for Directors to seek assistance even without assets or money left in the company.

It is important for Directors to discuss their options regardless of the company position, as licenced Insolvency Practitioners will be able to advise the best route. Two of the most common routes for Liquidation of an asset poor company are: via the redundancy process or privately funded, typically by one or more of the Directors.

If you have found yourself in this position or are concerned about how to go forward, please get in touch with our team. Discussing your unique position with us will provide us with an insight to offer clear, accurate advice based on the circumstances relevant to your company.

Remember, we are here to help.

Will my Employees be Paid?

In short, yes.

The Redundancy Payments Office of the Department of Trade and Industry ensures that employees are paid within the lawful limits relating to both redundancy and insolvency.

This body ensures final employee wages, holiday and notice pay as well as any outstanding wage arrears are paid. Financial help may be available for those companies unable to pay these arrears during Liquidation, so it is important to identify this problem ahead of time to avoid disruption to employees.

How will Funds be Allocated?

The Liquidator appointed to each case is responsible for assessing the outstanding creditors to identify the order of priority.

In most cases of Compulsory Liquidation, where a company has remaining debts the order will look something like this:

Asset Based Creditors (Banks, Finance Providers, etc.)

Expenses within the lead up to insolvency procedures

IP/Liquidator Services

Preferred/Preferential creditors (employees, HMRC, etc)

Unsecured Creditors (Suppliers, Contractors, Customers etc)

Shareholders (providing there is surplus revenue)

This order ensures that the most severe debts are dealt with before settling debts of a lesser severity.

Explore your Options

There are a number of routes to consider when a company is struggling financially from those discussed above to appointing an Administrator to implement a recovery process.

Liquidation may not always be the answer, and we are here to help you discuss the best options for you and your business. Whether you want to pursue an exit strategy, liquidate and cease trading or you are in financial distress, we have the tools, expertise and experience to guide you through the process.