What is liquidation?

When a company goes into liquidation, it means that the business is closing by selling off their assets to pay their creditors. Liquidation of a company can be in the form of a creditors voluntary action, members voluntary action or compulsory.

What is liquidation

The company liquidation process will differ based on the type of liquidation, but it will involve the sale of the business’s assets, holdings and property and is normally followed by the closure of the business. The aim is to pay the creditors as much as possible to give them the best outcome and wind down the business.

There are three types of company liquidation. The route chosen will depend upon whether the company is solvent or insolvent and who instigates the process:

Creditors voluntary liquidation

Creditors voluntary liquidation happens when a company’s directors voluntary go through the liquidation procedure. It usually follows when creditors are threatening to take action against the business for not paying their debts. The directors would approach a qualified insolvency practitioner to manage the process and work out the best outcome for the business’ creditors.

A voluntary liquidation is normally initiated when a company is in too much debt and cannot workaround their payments via revenue or through administration, finance help or a company voluntary arrangement (CVA).

The directors will need to show evidence for the reason to persue a company liquidation, but the process is managed on behalf of the creditors rather than the directors.

Members voluntary liquidation

In a members’ voluntary liquidation the shareholders appoint a liquidator to wind down a company which is no longer trading. All company assets are released by the liquidator to pay off any creditors. Any capital left will be paid to the company shareholders.

At least 75% of shareholders need to pass the liquidation, and all creditors are paid in full. A licensed insolvency practitioner will administer the process on behalf of the company.

Compulsory liquidation

When a business is failing and unable to meet its debts, a creditor may ask the court to force the company into liquidation. This normally occurs after the company has been asked for payment multiple times and served a statutory demand. If the business fails to pay, then the creditor can request compulsory liquidation.

The debt must be over £750 for a creditor to request compulsory liquidation and should also be undisputed. The creditor should issue a statutory demand first and if this is not paid after 21 days then a winding-up petition can be issued. A court judge then decides whether to go ahead with liquidation of assets in order for the company to pay off their debt.

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Paying off creditors

When a business liquidates their assets, the cash value can be paid to their creditors. Within the liquidation of a company there are three major classes of creditors, which helps to determine the order of payment to each creditor.

  • Secured

When a company has a debt with a secured creditor, it means they have committed assets to repay what was borrowed if they cannot make the repayments. For example, businesses may put company vehicles or property against the loan, which would be possessed if they can’t reach their payments.

  • Unsecured

In this instance, there was no commitment of assets against the creditor. Therefore, these creditors are often repaid after the secured creditors have received their money.

  • Stakeholders

Stakeholders have a vested interest in the business, but do not necessarily own any assets or have any claim on them. This would normally cover employees and so if there is any money left over after creditors are paid, this may cover their salaries.

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What does liquidation mean for directors?

Liquidation in business means the directors normally step down. They work with an insolvency practitioner who will organise liquidation of assets and paying the creditors.

Normally, in this circumstance there will also be an investigation into the directors’ spending behaviour to ensure that good business was executed, and creditors were prioritised over personal interests.

What does liquidation mean for employees?

Unfortunately, when you progress with company liquidation, it means the employees are no longer employed with the company as the business will cease trading. However, employees may be able to claim via the governments Fair Entitlements Guarantee scheme which allows them to receive redundancy pay and often, holiday pay.

What does liquidation mean for shareholders?

As the financial value of the assets is used to pay creditors, shareholders normally don’t receive any money until after debts have been paid. If they have shares in the limited company, the insolvency practitioner may ask them for payment.

If there is no money left from the sale of the assets, shareholders can register for capital loss.

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Advantages of company liquidation

Whilst liquidation will normally mean the end of a company, there are some advantages to going through the process.

  • Your creditors will receive some money back to them.
  • An insolvency practitioner can help close down the business, which can help to reduce stress.
  • As long as the directors have complied with the Insolvency Act 1986, any trading charges are unlikely.
  • It can be a faster process than other financial methods such as a CVA or entering into administration.
  • If a member’s voluntary liquidation is conducted, there may be some cash benefits.

Disadvantages of company liquidation

Despite some of the benefits that come from liquidation compared to other processes, there are some down sides to it too.

  • Your creditors may not receive all the money that is owed to them.
  • If Directors have prioritised personal interests over paying creditors, they may face fraudulent claims.
  • Similarly, if your company isn’t financially solvent, you could also face fraudulent charges.
  • Liquidation can impact reputation, which could affect future opportunities.

 

What are the alternatives to liquidation in business?

When you appoint an insolvency practitioner, they may advise you on other methods of closing down the business or paying off your creditors that may be available.

Administrative receivership

An administrative receivership is when a creditor appoints an insolvency practitioner to be an administrative receiver. A debenture must be granted first, which gives the creditor control over company assets. The receiver then organises recovering the debt for the creditor. This can be through selling part of all of the company, ceasing trading, selling assets or continuing business under supervision.

Company voluntary arrangement

A company voluntary arrangement or agreement (CVA) can be proposed to creditors to agree a payment plan. Creditors must agree to accept the proposal and are then bound to it and cannot take further action against the company. An insolvency practitioner will manage the process and payments until the CVA is complete.

Administration

When a company goes into administration, an insolvency practitioner acts as the administrator and manages the company’s affairs. The main aim is to recover the company from financial difficulty. An administrator can be appointed by company members of the board, directors or as an order from the court. During the period of time that a company is in administration, creditors cannot petition for liquidation. It can be a good way to attempt to rescue the company, before resorting to final measures and closing the company.

The content of this article was correct at time of publication.

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What is the role of the liquidator in the process?

A liquidator, who is an insolvency practitioner, is appointed to manage the liquidation process. They work in the best interests of their creditors in order to get them the best results.

Initially, if possible, they will try to rescue a business as it may produce a better result for the creditors. However, if this isn’t possible, they will manage the process and organise the sale of assets to repay debts.

The liquidator will also check that company directors have complied with the Insolvency Act 1986.

A liquidation company will realise the assets, address outstanding claims and distribute repayments to the company’s creditors.

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