What is Liquidation of a Company? An Ultimate Guide

In short:

• Liquidation refers to the selling off of a company’s assets in order to make them ‘liquid’.
• The funds raised by liquidating assets are used to pay any bills, debts and other costs that the company may owe.
• Liquidation can either be initiated by disgruntled creditors hoping to recoup their money, or directors looking to close their business

 

We get asked a lot of questions about company liquidation. Clients are often unsure what liquidation of a company is exactly, and whether it can be beneficial to their business.

As such, our resident liquidation expert and Senior Consultant, Ben Westoby has put together a quick guide that explains exactly what company liquidation is, the effect it can have on your business and the steps you need to take to make it happen.

 

What is meant by liquidation of a company?

“Liquidation is part of a business closure in which a company’s assets are sold (or liquidated) in order to pay off creditors” says Westoby.

“It’s the process taken when closing a limited company, selling assets and dissolving the company from the official register. This process tends to happen if you have cash flow problems on a regular basis and creditors are threatening to take enforcement action. It can also be a useful closure method for solvent businesses too.”

There are three main types of liquidation:

• Creditors’ voluntary liquidation (CVL) is used when a company is insolvent. This is initiated by the directors once they’ve recognised the company’s inability to pay its debts, and sees assets sold off in a bid to pay as many creditors as possible.
• Members’ voluntary liquidation (MVL) is used when a company is solvent but the directors no longer want the company or are ready to retire. It can also be used to release funds that are wrapped up in the company.
• Compulsory liquidation is forced upon a company by unhappy creditors and has to be processed through a court.

 

Is liquidation good for a company?

Whether liquidation is good or bad will depend on the circumstances of the company and the owner’s wishes.

While closing a business down can be upsetting for some, there are also some advantages to liquidating your company.

 

1. Eradicates the debt

The liquidation will write off the company debts once the assets have been sold off. Whatever monies are raised are used to clear as much of the company’s outstanding debt as possible.

In some cases there will be creditors at the bottom of the priority list that will have to accept a loss. As the process is handled by an independent third party (the insolvency practitioner), however, they should realise that this hasn’t been done in an unfairly biased manner, and that there is truly no other funds available.

 

2. Eases the pressure

Although the liquidation process is difficult, you won’t be undertaking it. Instead, the liquidators will take care of everything. This gives you time to breathe and think about your next move.

Liquidation can sometimes come as a great relief for those that have had company debts hanging over them. Having a third party take care of disgruntled creditors and paving the way for a fresh start can be quire attractive for beleaguered directors.

 

3. Employees get paid redundancy

Many worry about how the closure of a business will affect its staff.

The good news is that eligible employees are able to claim redundancy during a liquidation. Even if there aren’t enough assets to cover the cost, this shortfall comes from the government. Directors of the company are also able to claim for redundancy pay. The average claim is currently around £9,000.

 

4. It may not cost you anything

The initial cost of preparing the statement of affairs is relatively low and the remaining costs are taken from the sale of the company’s assets, so it often doesn’t cost much for all the work to be done for you.

As mentioned above, many directors are entitled to redundancy pay, and this is often used to cover the cost of liquidation.

 

What is the downside of liquidating a company?

For all the potential positives of liquidation, It’s never fun to close down a company that you’ve worked so hard to build up. As such, there are some drawbacks for some.

 

Making staff redundant

When businesses are closed down, it’s sadly inevitable that any staff they had will be made redundant. This can be one of the most upsetting factors for many directors.

 

Personal guarantees have to be paid

In general, a limited company liquidation protects directors from any personal liability. However, if there has you have taken any finance out using a personal guarantee, this will need to be repaid to the lender.

 

Public procedure

Liquidations are announced in The Gazette, a free-to-access website alongside other closure details.

 

Can be an invasive process

While some will be happy that the whole process is taken out of their hands by a third party, others may not relish relinquishing so much control.

“Directors are also put under scrutiny as part of the procedure” says Westoby. “How much so is dependent on which type of liquidation it is. As you may imagine, a members’ voluntary liquidation requires only minimal checking as there are no disgruntled creditors involved. A CVL, however, will involve at least some digging into your business affairs to make sure that everything is above board.

“Compulsory liquidations carry the most invasive processes, with severe and rigorous investigations being carried out to check for signs of any wrongdoing” he adds.

 

 

What happens when a company is in liquidation?

In general, a third party will oversee the sale of the company’s assets in order to raise enough money to pay its creditors.

There are several stages that a liquidation will commonly go through.

 

1. Appointment of an insolvency practitioner

• Firstly, you’ll need to assess whether a liquidation is the right route for you and your company to take.
• An insolvency practitioner (IP) will then need to be appointed. This is the liquidator who will be in charge of the whole process.
• The IP will gather all the information they need from the director. This can include company accounts, records, creditor lists, asset lists and cash flow information.
• Official documents are written up.
• An assessment of the Statement of Affairs takes place. This shows where the company’s finances stand at the point of liquidation.
• If the company is entering into a members’ voluntary liquidation (MVL), a Declaration of Solvency will also need to be signed at this point.

 

2. Gazette publication

• The proposed liquidation action must be advertised in the Gazette (which is now an online publication). This is mandatory for all companies proposing closure. It allows any creditors the chance to spot the company’s intention to liquidate, and make a claim.

 

3. Meeting of creditors

• Any creditors who put forward a claim are corresponded with. They must be given a certain period of time to respond.
• Anyone owed money will either be notified at least seven days before the creditors meeting, or given notice that unless they object, the process will go ahead. Without an objection, the liquidators can proceed with ‘deemed consent’.
• Until very recently, physical creditors meetings were required, but this process can now be done virtually. It’s down to the liquidator which path they take, but virtual meetings are increasingly becoming the norm.
• While the director is technically the chairman, it’s the IP that leads any creditor meeting.
• These meetings are usually stress-free. Creditors vote to confirm that liquidating the company is the best option, and that the liquidator can be officially appointed to oversee the the process.

 

4. Liquidation (of assets, if any)

• The term liquidation actually refers to the sale and disbursement of the company assets (i.e. turning something physical into ‘liquid’ cash).
• The firm’s assets are sold by the liquidator at their highest possible value, with the cash raised paying off any company liabilities.
• Assets are generally auctioned off, but it is possible for directors to buy the assets themselves. However, the price must match that of an independent valuation, and deemed to be in the best interests of the creditors.
• After all the assets have been sold, the cost of the insolvency practitioner’s fees are paid, and creditor claims are settled.
• The IP will then formally dissolve the company and remove it from the Companies House register. The process is then complete.

Of course, in cases where there are little-to-no company-owned assets, the liquidators must still be paid. In this case, there are two options:

• An instalment agreement would be drawn up to pay the liquidator.
• The IP takes on instruction in the understanding that a proportion of the director’s redundancy claim will be used to fund the liquidation.

 

Don’t be tempted by cheap liquidation services

Prices differ depending on the circumstances of each company and the amount of work an IP will need to do. In general though, you should expect to pay around £5,000 for a liquidation.

There are companies that will offer liquidations for much lower than this, and while this can be tempting at a time when funds are tight, they usually see you paying more overall.

Once their liquidators have taken control of your company, they are then able to come after you personally for any overdrawn director’s loans. This is then added to their fee which, all of a sudden, is much more than the initial small price they originally quoted.

Whomever you choose, make sure that you do your due diligence checks on them by looking at reviews and asking questions beforehand. An honest, transparent company will have independent reviews front and centre, rather than hand-picked, faceless testimonials. Here’s our Trustpilot page.

 

 

Is liquidation the same as closing?

If a company enters liquidation, it’s definitely closing.

In terms of whether the words mean the same thing though, no. Liquidation is just one method of closure. Some businesses can be closed without the need for liquidation.

 

Who benefits from liquidation?

A good liquidation can benefit both creditor and business owner.

As an attempt to pay the company’s debts off, it benefits creditors. Because it’s also an effective way to solve business debts, it’s beneficial to company owners too.

 

Is there an order of priority in which people are paid in a liquidation?

1. Secured creditors with fixed charges
2. Preferential creditors (staff wages, etc.)
3. Secondary preferential creditors (VAT, NI contributions, etc.)
4. Secured creditors with floating charges
5. Unsecured creditors
6. Shareholders

This is a legal list of payment priority which the the IP will adhere to strictly.

 

What happens to a director of a company in liquidation?

As directors are subject to a thorough investigation into their conduct as part of a liquidation, the consequences of the process depend on the director’s conduct. In most cases, nothing happens to the director at all. If, however, any evidence of misconduct is found, a disqualification from acting as a director can be implemented.

In the vast majority of cases, the limited company liquidation process has no effect on company directors.

Of course, technically it’ll be public knowledge that you were once a director of a company that was liquidated, but this is only seen if someone has done an in-depth search on you (and the outstanding debts are not public knowledge).

As far as your personal credit rating and reputation goes, there should be no lasting effect whatsoever. Millions of successful businesspeople have experienced at least one liquidation along the way. Lessons are learnt and entrepreneurs often come back stronger.

There are, of course, exceptions. You may have heard the horror stories of personal liability and disqualification, but these are results of either director wrongdoing or incompetent liquidators. If any problems are likely to arise, our job is to pin-point them beforehand, and advise you on the appropriate action.

 

How long does a liquidation take?

There is no maximum time limit for a liquidation. Typically, the process takes between 6-24 months to complete but can be longer should there be any disputes along the way.

 

Do contracts terminate on liquidation?

Any contracts should have already been terminated before a liquidation is completed. As part of the process, the business must cease trading immediately. Creditors are also involved in the process during meetings and are notified by the liquidator early on. Any staff, meanwhile, should have been let go once the business stopped trading.

 

Can a company be saved from liquidation?

There are many options available to companies worried that they might become insolvent. If they’ve already entered into liquidation, however, it is very difficult to reverse.

While it’s technically possible to reverse a voluntary liquidation within 6 years of the formal dissolution, it’s very difficult and requires a court order and a great deal of legal work.

 

Understanding the different types of company liquidation

Solvent Liquidation

Solvent liquidation, also known as a members’ voluntary liquidation, is when the directors and shareholders have the choice to close their limited company down, with the intention of withdrawing cash or assets in a tax-efficient way. This process can take anywhere between six and 24 months, but this of course depends on the company’s current position.

 

Insolvent Liquidation

Insolvent liquidation or creditors’ voluntary liquidation, means that your company is having to close because it can’t pay its bills or debt anymore, or the value of the business assets is less than its liabilities. Similar to solvent liquidation, this process roughly takes between 6 – 24 months.

 

Compulsory Liquidation

Compulsory liquidation is a court-based process under which the assets of a company are released and distributed to the company’s creditors. This process is started by the filing of a petition at court. Once your company has gone into compulsory liquidation you’ll be banned for 5 years from forming, managing or promoting any business with the same, or similar, name to your previous company.

 

What are the consequences of liquidation?

Once your business has been liquidated it will be ‘struck off’ the listings of Companies House. All the company’s assets are then used to pay off any outstanding debts. If there’s any money left, it goes to the shareholders.

After your business has gone into liquidation you cannot revive it at a later date unless a court order decrees it.

 

Think a liquidation might benefit your company?

UK businesses have had to contend with setback after setback over the last few years. Global pandemics, cost-of-living-crises, and energy price hikes have all contributed to making operating a business more difficult than it has been for some time.

If you’re concerned that your company will struggle to absorb these and other costs in the future, you need to seek help before it becomes an issue.

We have specialists on hand that can help you to facilitate turnaround strategies, sell your business, or close down your company depending on the best route available to you. Call us on 0800 975 0380, or email advice@forbesburton.com for a free consultation.

Alternatively, you can find out if your company qualifies for liquidation with our online liquidation test.