Liquidation: 11 Common questions answered

Trying to ascertain what liquidation is, the different types, and what happens during the process? You’re in the right place.

In this post we answer the most common questions about company liquidation.

Jump straight to: 

1. What is liquidation?
2. What are the types?
3. What is the difference between liquidation and bankruptcy?
4. What happens to assets?
5. What are the rights of creditors?
6. What happens to employees?
7. What about personal liabilities?
8. What are the costs?
9. What are the benefits?
10. What are the disadvantages?
11. Can a company be saved?

 

 

1) What is liquidation? 

Liquidation is a process which ultimately renders a limited company permanently closed, with no ability to trade or employ staff.

It is primarily there to repay company debts to creditors by liquidating company assets (if there are any).  It can happen to a solvent or insolvent company.

There are three types; members’ voluntary liquidation (MVL), creditors voluntary liquidation (CVL) and compulsory liquidation. Read on for details of these liquidation procedures.

What is the process? 

The process of a MVL, CVL and compulsory liquidation are slightly different. So here we’ll break down the CVL process, as an example:

1. Advice: A licensed insolvency practitioner (IP) meets with the company directors to obtain a full company background and take detailed financial information.  
2. Asset Appraisal: Details of all tangible and intangible assets are taken, so their total monetary value can be determined. Once the assets have been listed in full, they need to be appraised to determine their fair market value. This is usually done by a specialist independent valuation agent.
3. Decision from shareholders: The shareholders must pass winding up resolutions and appoint a liquidator in a meeting or by written resolution.  
4. Notifying creditors: The company’s creditors must be notified of the impending liquidation. The IP assists the directors with preparing; a report detailing the company’s background history; and a statement of the company’s affairs which details its assets and liabilities. 
5. Creditors decision: The creditors consider these documents at a virtual meeting, or via a deemed consent process, and decide whether to agree with the shareholders choice of liquidator or whether to appoint a different liquidator of their choosing.
6. Sale of assets: The company assets are then sold and their cash amounts realised (liquidated). Company assets are sold in the way that gains the most return. 
7. Investigations: The liquidator is required to carry out an investigation into the causes of the company’s failure. This includes reviewing company records to identify any misappropriation of funds and reporting to the Insolvency Service director disqualification unit on any findings.
8. Distribution and closure: If there are sufficient realisations, the proceeds are then used to pay the costs and expenses of the liquidation and then make a payment to the company’s creditors. Then all legal and administrative matters related to the proceedings are completed, including the filing of final tax returns and the dissolution of the company or estate.

Who can initiate proceedings? 

The specific process for initiating liquidation can depend on the context, but generally, there are a few parties who can initiate the process:

1. Company directors or shareholders: Directors or shareholders can initiate a voluntary liquidation if they determine that the company is unable to pay its debts.This can also happen for an MVL when the company is solvent. 
2. Creditors: Creditors can initiate a compulsory liquidation by applying to the court for an order to wind up the company.
3. Court or government officials: In some cases, 
4. The Insolvency Service can initiate proceedings if the company is operating unlawfully, or if it is in the public interest.

 

2) What are the types of liquidation? 

There are three types, not all of which require the company to be insolvent: 

Members voluntary liquidation (MVL):

In a members voluntary liquidation, a company is still solvent but has come to the end of its useful life. This may happen if the owner wishes to retire or doesn’t want to run the company anymore.

There is often enough value in the remaining assets to pay company creditors, with any remaining funds or assets distributed to the company’s shareholders. 

Creditors voluntary liquidation (CVL):

Creditors voluntary liquidation occurs when a company does not have sufficient assets or funds to pay its liabilities or continue trading.

So, directors and shareholders take the decision to place the company into liquidation and hand control over to a licensed insolvency practitioner, who consequently winds up the company’s affairs. 

Compulsory liquidation:

Compulsory liquidation is another type of insolvent liquidation.  Usually initiated by a creditor who petitions the court for a company who owes that creditor money, to be wound up (the amount owed must be at least £750). 

After a winding up order has been made, the case is passed to the Official Receiver who initially acts as liquidator. But the Official Receiver may also transfer the liquidation to a licenced insolvency practitioner to act as liquidator to continue the liquidation process of realising company assets to pay liabilities.

The company and directors themselves can also petition the courts, but this is a less common scenario. 

 

3) What is the difference between liquidation and bankruptcy? 

In our blog Insolvency vs Liquidation vs Bankruptcy we detail the key differences between these three terms.

4) What happens to assets?

Company assets are sold or ‘liquidated’ in the most appropriate way that realises their highest value.

The assets are liquidated in order to cover the costs of the liquidation process and to pay company debts to its creditors. If there is any cash leftover after all creditors have been paid, it is distributed amongst shareholders such as the company’s directors.

5) What are the rights of creditors? 

In a company liquidation in the UK, creditors have certain rights that are designed to protect their interests. These include

1. Priority in payment: Creditors are typically paid in a specific order of priority during a liquidation (often secured creditors before unsecured creditors).
2. Right to receive notice and participate: The liquidator must give notice of the liquidation to all creditors. Creditors have the right to participate in meetings or decisions of shareholders and may also be able to appoint a liquidator of their choice.
3. Right to receive notice of the liquidation:Right to make a claim: Creditors have the right to make a claim for any money owed to them from the insolvent company. Then, if there are sufficient surplus funds in the liquidation, the liquidator can make a payment to creditors who have lodged their claim.
4. Right to challenge decisions: Creditors have the right to challenge decisions made by the liquidator by applying to court, if they believe that the decision is unfair or not in their interests (but only if they reach a specific threshold amount of their claim in proportion to other creditors).

Overall, the rights of creditors in a company liquidation in the UK are designed to ensure that they are treated fairly and have the opportunity to recover as much of their money as possible.

 

6) What happens to employees in insolvent liquidations? Do they get paid?

When liquidation is used as an insolvency solution (i.e. compulsory or CVL), employees are made redundant. 

Staff would then be entitled to claim redundancy pay, along with other statutory entitlements such as arrears of wages, overtime, or commission, pay for untaken holiday allowance, and notice pay. 

Employees are paid from the Redundancy Payments Service (RPS); a branch of the government Insolvency Service. And under UK law, they are entitled to receive the following items, up to a maximum value of £643 per week (though this figure is revised periodically):

1. Any wages or salary owed to them for up to 8 weeks prior to the liquidation. 
2. Any holiday pay owed to them.
3. Pay in lieu of notice
4. Any payments owed under a redundancy scheme or protective award.

From a company standpoint, the RPS then claims back the amounts it’s given to employees, during the insolvency/liquidation process. Arrears of pay and holiday pay are preferential, so these are paid ahead of other unsecured creditors. But redundancy pay and pay in lieu of notice are ranked alongside other unsecured creditors. 

Employees who have additional claims can also lodge a claim in the insolvency. For example people who earned more than £643 per week. However, it’s important to note that not all employees are entitled to these payments. For example, if wages or salary owed was from before the 8-week lead-up to liquidation.

The actual amount of cash employees and creditors will be paid back in an insolvent liquidation depends on the company, the value of the assets and other nuances. If the liquidation process does not generate enough funds to pay all preferential creditors, employees might not receive the full amount owed to them.

 

7) What about personal liability?

When a company is unable to pay its debts, directors are usually given the protection of limited liability. However, there are some cases where a director can be made personally liable for a limited company debt. 

In the case of personal guarantees, for example. If a director signed a personal guarantee for a company debt and is unable to pay it, they will be held personally liable. This is common for newer companies or those with disadvantaged credit history. 

Another scenario is an overdrawn director’s loan. A director’s loan account lets a director take money from the company is a way that isn’t classed as a salary, dividend or expense. Any funds taken must be recorded. If a director takes more than they put in, the account is overdrawn and the director would then have to repay the company this debt when it is liquidated.  

Finally, directors of a company can also face personal liabilities if they have acted improperly or unlawfully. For example, if directors are found to have been:

• Trading while insolvent
• Breaching their fiduciary duty
• Taking unlawful dividends
• Participating in fraudulent or illegal activity 

8) What are the costs of liquidation?

What are the monetary cost implications of a liquidation?

The costs of company liquidation in the UK can vary depending on a number of factors, including the size of the company, the complexity of its financial affairs, and the type of liquidation being pursued. Here are some potential costs to consider:

1. Licensed insolvency practitioner fees
2. Legal fees
3. Payment of creditors’ claims
4. Costs of asset valuation and asset sales
5. Administrative costs

These costs will typically be met from the assets within the company liquidation estate.  If there are no or minimal assets, then director’s can pay towards the costs of liquidating the company.

‘Time costs’ – the duration of a liquidation

As with monetary costs, the time take to complete liquidation procedures depends on the case.

In general, a straightforward liquidation process can take anywhere from 6 months to a year to complete.

However, if the liquidation process is complicated, it can take considerably longer.

 

9) What are the benefits of liquidation?

Though it may be considered to be a sad end for a company, there are some benefits to liquidation proceedings:

1. Elimination of debt: Liquidation can help a company get rid of its liabilities. This can be particularly useful if the company is in financial difficulty and is unable to pay bills or meet its financial obligations.
2. Closure: Instead of continuing to operate at a loss, the company can be closed down and the remaining assets can be sold to pay off creditors.
3. Simplicity: Liquidation can be a relatively simple process.
4. A fresh start: In some cases, liquidation can provide a fresh start for the business owner. With the debts and obligations of the old company eliminated, a director can potentially start a new venture without the financial burden of past failed companies.

10) What are the disadvantages of liquidation?

There can also be drawbacks to liquidation, particularly for the company that is being liquidated and its stakeholders. These include:

1. Loss of control: When a company is liquidated, control is transferred to a liquidator, who is responsible for selling off the company’s assets, among other roles. 
2. Reduced value of assets: Assets are often sold quickly and at a discount to maximise the amount of money available to pay off creditors. This can result in lower prices for assets than normal, reducing the amount of money available to pay off debts.
3. Job losses: When a company is liquidated, it likely involves letting go of staff. This can have an impact on the local community and economy, especially for companies who employ a large number of people.
4. Negative impact on creditors: While liquidation may result in some debts being repaid, it is unlikely that all creditors will receive full payment. 

 

11) Can a company be saved from liquidation? 

With the help of a professional, such as an insolvency practitioner, there is a potential for a company to be saved from liquidation. 

Certain actions must be taken in a timely and effective manner, for example:

1. Restructuring: to resolve the underlying issues that led to the possibility of liquidation. This could involve renegotiating debts, reducing costs, reorganising the business and improving efficiencies.
2. Capital injection: from investors, lenders, or other sources to improve the company’s financial position and liquidity. This may include commercial finance.
3. Negotiation with creditors: to restructure or defer its debts, or to settle them for a lower amount. This can help the company reduce its debt burden and improve its cash flow.
4. Sale or merger: with another company, to help the company generate cash, reduce costs, and ultimately scale.
5. Legal solutions: such as a company’s voluntary arrangement or administration. This can help the company avoid liquidation and emerge as a viable business.

 

Talk to us today

Your 11 questions have been answered! As you can see, liquidation can be a complicated process and is best managed by an experienced insolvency practitioner.

If you require assistance in the case of liquidation or wider insolvency concerns, get in touch with our team today.