Company Liquidation
Company Liquidation
A formal insolvency procedure, company liquidation brings about the end of an unwanted or unviable business and dissolves it from the Companies Register. Through liquidation, a licensed insolvency practitioner will close a company, sell its assets, redistribute these amongst its creditors and shareholders (in a specific order of priority), and then dissolve the business. Company closure can be a voluntary or compulsory process.
At James Edward & Associates, we understand the complexities involved when a business faces financial difficulty. And where it is no longer possible to continue trading, we provide expert advice to help our clients through the company liquidation process and ensure the best possible outcome for directors, employees, and creditors.
Our empathetic and pragmatic solicitors assist at all stages of corporate insolvency. And we work closely with other professionals, such as insolvency practitioners, barristers, tax advisors and accountants, to make sure you have all the support you need. It is important that you seek advice at an early stage to explore all options available to you.
What does liquidation mean?
In very simple terms, liquidation is the process of legally closing a business and distributing its assets to its shareholders and claimants. In the UK, the laws surrounding liquidation are primarily defined by the Insolvency Act 1986.
According to the Insolvency Service, “One in 213 active companies entered liquidation between 1 October 2021 and 30 September 2022.” This figure was a 29% increase year-on-year. Registered company insolvencies in Q3 2022 were also “higher than pre-pandemic levels, driven by a historically high number of CVLs {creditors’ voluntary liquidation} and an increase in compulsory liquidations.”
Types of Company Liquidation
There are different types of company liquidation, and at James Edward & Associates, we act on behalf of businesses and insolvency practitioners in relation to both compulsory and creditors’ voluntary liquidations.
Compulsory liquidation
Compulsory liquidations happen when a business’s creditors petition for it to be liquidated. This move often occurs when a company is experiencing hard times and cannot pay what it owes. A creditor that is owed money can make an application to the High Court to wind up a company. This application usually happens after the creditor has made several unsuccessful attempts to recover the debt. In addition to unpaid suppliers and other creditors, HMRC regularly winds-up companies due to unpaid tax and VAT.
Once a creditor has applied to the Court, the debtor company will be served with a winding-up petition. Following this, the struggling company has seven days to challenge the application, pay its debt, arrange a company voluntary arrangement (CVA), or enter administration.
Where administration is the only option, the Court will issue a winding-up order and put an official receiver (OR) in charge of the company and the liquidation process. The OR may delegate its role to a chosen insolvency practitioner (IP). The official receiver and/or insolvency practitioner is then known as the ‘liquidator’ of the company. The liquidator will compile a list of all company creditors and seek to realise the company’s assets to pay off debts owed. The liquidator will also investigate the company to see whether there are any potential claims against its directors or whether any antecedent transactions have taken place which they can challenge.
If your business is presented with a winding up petition, it’s imperative you get expert legal advice ASAP. Speak to our specialist lawyers who will help you through the process and protect your business and personal interests.
Creditors' voluntary liquidation (CVL)
In some cases, rather than struggling with unmanageable debts, a company will decide to cease trading and close; this is known as creditors’ voluntary liquidation (CVL). Initiated by the company’s directors, a CVL arrangement allows for the voluntary winding down of a company and the liquidation of its assets. The CVL arrangement is agreed between a company’s directors, creditors, and members.
Like in compulsory liquidation, with CVL an insolvency practitioner is appointed to take over the control of the company. The previous directors must comply with all reasonable requests of the insolvency practitioner. However, as this is a voluntary process, the directors can appoint a suitably licensed insolvency practitioner of their choice (they are also responsible
for paying their fees) and have some control over the liquidation process.
This degree of control is one of the main benefits of CVL over compulsory liquidation. Moreover, with CVL, the whole winding up process can be completed much quicker. As well as bringing an end to the matter and letting directors move on to the next stage of their careers, formal liquidation also helps employees to claim their redundancy pay faster.
Members voluntary liquidation (MVL)
Advantages of Company Liquidation
While going through the liquidation process is rarely easy, there are usually some positive outcomes to be had. For directors struggling with financially unviable businesses, often for many years, the fact that their business’s debts are largely written off at the end of the process (except in specific circumstances) can be a huge relief.
Liquidation costs are also met through the sale of the company’s assets, and the IP assumes responsibility for staff redundancies, cancelling any leases, etc. Staff can also claim redundancy pay, uncollected wages and outstanding holiday pay.
In addition, it is a statutory requirement for directors to minimise potential loss to the company’s creditors once they know that there is no reasonable prospect of the business avoiding liquidation. If directors fail to comply with this duty, they may incur personal liability. Once an IP is appointed to oversee the liquidation process, the risk of its directors wrongfully trading is greatly reduced.
There are also some additional advantages to creditors’ voluntary liquidation, including:
- Directors can appoint their own chosen insolvency practitioner.
- Directors have a degree of control over the liquidation proces
- Directors may be able to buy back assets (the IP is obliged to generate as much money as possible during liquidation, so offers to buy back assets during or following liquidation can be considered).
Disadvantages of Company Liquidation
Of course, there are also several significant disadvantages to company liquidation. Primarily, in that through liquidation, the company will cease to exist, directors and employees will lose their jobs, and many suppliers and creditors will lose money.
In addition, when faced with compulsory liquidation and receiving a winding-up petition, a business’s financial difficulties are made public and advertised in The Gazette, thus warning the debtor company’s bank, other creditors, and potential customers about what is happening. At this time, it can be extremely difficult for a business to recover financially.
Other disadvantages of company liquidation:
- As well as being unable to continue trading, the directors will likely be restricted from setting up a business with the same or similar company name.
- The business will lose its reputation, trading licences or other valuable assets.
- Personal guarantees to creditors will be called in (where made), and creditors can take directors to Court if they don't pay.
- The investigation process can be time-consuming and stressful. The liquidator will go through the company's entire history and finances, which is likely to feel invasive.
What are the alternatives to company liquidation?
When your company faces insolvency, your options may seem limited. But there are some alternatives to company liquidation.
- You may be able to dissolve your business via a 'company strike off'. This is a voluntary process where directors of solvent companies apply to Companies House to be removed from the register.
- Rather than waiting for a winding-up petition to be issued, you could enter a company voluntary arrangement (CVA) if you can reach an agreement with your creditors. A CVA will allow you to continue trading while making agreed monthly payments to creditors for an agreed-upon term. A licensed insolvency practitioner will oversee this process.
- You may be able to enter administration and continue trading in some form. The administration process is often used to rescue companies struggling to pay their debts. Administration can provide crucial time to weigh your options such as exploring restructuring or voluntary liquidation.
- As well as being used to restructure a business, administration can be used to sell a company (this includes all its historical, current, and future debts and liabilities). Often this is done via a pre-pack administration whereby a company entering administration has negotiated a sale beforehand. Pre-pack administration can be used to create a new company with a viable business model while escaping debt. However, it can be viewed negatively and requires expert help to execute correctly
What are the implications of liquidation on the company directors?
Directors are not usually personally liable for the company’s debts. And you may be entitled to claim director redundancy entitlement if your company has entered into a voluntary insolvent liquidation process. This is only possible when directors are also classed as employees of the business and take a salary through PAYE.
But suppose you are a director of a company that has entered liquidation. In that case, your personal assets could be at risk if you signed a personal guarantee or have an overdrawn director’s loan account (DLA) as this will be treated as an asset of the company.
Furthermore, if you have knowingly continued to trade during insolvency, you could be found guilty of wrongful trading and be held liable for some or all company debts. And, if during the investigation the liquidator decides your conduct was unfit, you could be prosecuted or banned from being a director for 2 to 15 years. ‘Unfit conduct’ includes:
- Allowing a company to continue trading when it can't pay its debts
- Not keeping proper company accounting records
- Not sending accounts and returns to Companies House
- Not paying tax owed by the company
- Using company money or assets for personal benefit.
The OR will also investigate the directors’ conduct and check for any unusual transactions. If they uncover any evidence of misconduct, the director could face stiff penalties. As such, any company director issued with a winding-up order, or aware that liquidation is inevitable, must not do the following to avoid being held personally liable:
- Make a preferential payment to any specific creditor (making them better off than other creditors).
- Repay loans to themselves, friends, or family before HMRC and the other creditors.
- Continue trading if they know that the business is insolvent. Doing so may make them personally liable for debts incurred by the company from the date they knew about the insolvency.
- Hide any financial documents and records. Rather, they must ensure these are correct, available, and protected.
If you are a director facing liquidation, it’s also important that you do not make a personal guarantee for company borrowing as this will make you liable if the debt is unpaid.
Who gets paid first from a company in liquidation?
- Any secured creditor. Banks or other creditors that have a legal right or charge over the business's 'property'. As well as buildings, 'property' covers assets such as equipment, patents, and intellectual property.
- Expenses incurred by the insolvent estate. Any costs and expenses incurred by insolvency practitioners related to the insolvency process are paid next.
- Preferential creditors. This includes business employees (in relation to pay arrears and holiday pay) and HMRC.
- Fixed and floating charge creditors. Fixed and floating charges are taken on to secure financing for limited companies. Lenders often demand these charges before loaning a business money.
- Unsecured creditors. Unsecured creditors include suppliers, customers, contractors, and clients of the insolvent company. These creditors must claim for the repayment of their debt. However, many unsecured creditors receive little, if any, money through liquidation.
- Shareholders. Any money left goes to shareholders.
How long does it take to liquidate a company?
There is no set timescale for company liquidation. In most cases, it takes between six and 24 months, but this depends on your company’s position, size, and type of liquidation. As a rough guide, here are some key timelines:
For compulsory liquidation
- After a creditor has served a winding-up petition against a business, they must wait seven days to advertise.
- The petition must be advertised seven days before the Court hearing date to inform other creditors that the debtor company is insolvent.
- The winding-up petition hearing usually takes place eight to ten weeks after the petition is served.
- The appointment of a liquidator usually takes between one and two weeks. A creditors' meeting also takes place at this time, approximately one month after the company ceases to trade.
For creditors’ voluntary liquidation (CVL)
- The process to wind a company up is initiated at a board of directors meeting. A date will be set at this meeting for subsequent shareholders and creditors meetings (typically on the same day). Usually, there will be 14 days between the board and other meetings to allow for the relevant notices.
- The appointment of a liquidator usually takes between one and two weeks.
Company Liquidation - FAQs
Company liquidation is a complex process that must be handled expertly, carefully, and professionally. As such, if you are facing liquidation, we strongly recommend seeking legal advice ASAP to explore all available options. Here are some of the most common questions we get asked about company liquidation.
If you are a creditor of a business that cannot pay its debt to you, we can help you to issue a winding-up petition, to liquidate a company and help get what you are owed. You must be able to prove that the debtor company cannot pay its debts and include details of the debt, including the amount, how it arose, and how long it has been overdue. However, there is no guarantee that you will get any money back, especially if you are an unsecured creditor.
If you are a company director looking to start CVL, your business must refrain from taking on any additional credit agreements or making preferential payments to certain creditors. You should immediately cease trading and consult a licensed insolvency practitioner. We can advise you on how to do this. However, liquidation might not be necessary even if your business is in financial trouble. Alternative options are available, and with the right support, it may even be possible to rescue your business.
A company might go into liquidation for several reasons. And while it is easy to blame poor decision-making, management, and inefficient practices, this isn’t always the case. Many reasons behind company liquidation are out of the control of directors and can include:
- Operating in a market that has declined and is no longer profitable
- Relying heavily on one or two large customers that have gone out of business or which have started using your competitors
- Receiving unexpected bills (e.g. in 2022, the energy crisis caused financial difficulties for many previously thriving businesses across the UK)
- Having customers that are struggling and not paying their bills on time.
Global events such as the Covid pandemic and the War in Ukraine can also significantly impact a business’s profitability and ability to continue trading.
Following liquidation, directors are banned for five years from forming, managing, or promoting any business with the same or similar name to the liquidated company (in most cases). But there is nothing to stop a director from starting a new company immediately after their previous business has become insolvent. An exception to this is if the liquidator decides that a director is guilty of unfit conduct. In such cases, they could be banned from being a director for two to 15 years.
The Insolvency Service may bring proceedings on behalf of the Secretary of State if unfit conduct is alleged. If a director is found guilty of unacceptable conduct, they will be prevented from becoming a director under the Company Disqualification Act 1986. However, most companies do not fail because of unfit conduct.
In some cases, it might be possible to restore a liquidated company. To do this, a Court Order will be required, and the process can be lengthy and costly. Often, companies ask to be restored to the register as they wish to reinstate the company’s trading potential. However, there are other reasons why a company might be reinstated.
For example, once a company is removed from the Companies House register, any remaining assets are transferred to the Crown. The only way to recover these assets is to restore the business, so creditors may apply to restore the company to recover monies owed. In other cases, people may want to mount a legal claim against the business.
Once a liquidator is appointed, the directors no longer control the company or anything it owns. So they cannot act for, or on behalf of the business. In addition, during the company liquidation process, directors must:
- Provide the liquidator with any requested information about the business
- Hand over all the company’s assets, records, and paperwork
- Make themselves available for interview by the liquidator, if requested.
Directors are not usually personally liable for the company’s debts.
In short, when a company goes into liquidation, it will:
- Stop doing business
- Stop employing people
- Have its assets sold to pay off its debts (with anything remaining going to
shareholders) - Cease to exist once it has been removed (struck off) from the register at Companies House.
The liquidation process also sees the liquidator go through the following initial steps:
- Evidence gathering. The liquidator will collate all the necessary information to investigate the company. This includes all books, records of company assets, cash and book debts, and a list of all non-physical assets.
- Creditor list. Directors provide the liquidator with a full list of creditors. This should include details of money owed. The IP will then notify these creditors officially.
- Asset valuation. The company’s assets will be valued and sold.
- Creditor payment. The IP will distribute the liquidated assets to the business’s creditors (and cover the liquidation costs).
- Employee management. The IP will make all staff redundant, help them with any claims.
- Investigation. The IP will also investigate the conduct of the company directors.
Often, employees of a business facing liquidation will not have received their last month’s wages. However, once a company enters the formal insolvency procedure, staff can claim redundancy pay, arrears of pay, holiday pay, overtime, commission, and money in lieu of notice. In an ideal situation, a company should be able to pay staff what they are due on redundancy, but in many cases, insolvent companies do not have enough money to cover the amount owed.
To ensure employees get what they are due, and to provide a degree of protection to staff, the government’s National Insurance Fund (NIF) covers the cost of redundancy in such cases. Employees should submit their redundancy pay claims through the Redundancy Payments Office of the Department of Trade and Industry.
There is no set cost for company liquidation and the work done by the licensed insolvency practitioner. Fees vary depending on several factors, including the case’s complexity and the time spent closing a business. The more complicated the case, the higher the likely fees. Any costs and expenses incurred by insolvency practitioners that relate to the insolvency process are usually paid from the assets sold.
As a rough guide, a straightforward liquidation via a creditors’ voluntary liquidation (CVL) could cost around £4,000 – £6,000 + VAT.
Yes, because a director’s personal and business finances are usually kept separate, the liquidation won’t appear on their personal credit file. So the liquidation should not impact their ability to get a mortgage (although it could impact their incomings and affect any mortgage offer that way).
However, if a director provided a personal guarantee to secure business finance, they could find it more challenging to get a mortgage during/following company insolvency.
A business’s shares become worthless after liquidation. For investors, this means that any shares of a liquidated company should be declared as a capital loss and removed from their portfolio. If a business goes into administration before (or rather than) liquidation, trading in shares is suspended for a set period.
When a company enters liquidation, depending on the type of shares they hold, shareholders may be entitled to a portion of the business assets. However, shareholders are the lowest in terms of priority when redistributing a failed business’s assets. This order of importance means that shareholders will only get a return on their shares after all other creditors get paid in full. This is unlikely to happen in most cases. Shareholders that have claims as other creditors may receive a separate payment (from any return on shares).
Contact our company liquidation lawyers
At James Edward & Associates, we can help you through the winding-up and insolvency process to ensure the best possible outcome for you and your business. Industry leaders when it comes to providing specialist advice and representation in this field, we were proud to have been nominated as Insolvency Law Firm finalists of the year.
Our leading corporate insolvency solicitors regularly help businesses in London, across the UK, Europe, South America, and the USA. This includes where there are cross-border and international offshore issues. And, supporting you through what can be the most emotionally draining and challenging time of your business life, our advice is both pragmatic and sympathetic to your situation.
Because of our open and honest approach, we make even the most complicated of situations easy to understand. To find out more, contact us today on +44 7441912822 or email info@jamesedwardassociates.com and learn more about how we can help you.
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