Frequently Asked Questions

If you are thinking about company liquidation, insolvency or just worried that things are no longer viable for your company our guide to the first stages of company liquidation will be valuable. We will break up the process for you into clear and easy to understand blocks:

 

What is the difference between winding up and liquidating your company?

Should I choose liquidation to close my company?

The two main types of liquidation

How much does it cost to liquidate your company?

How long does it take for you to liquidate your company?

My company is insolvent but has no funds to liquidate?

The liquidation process step by step

How will liquidating my company affect me?

Priority of claims from creditors

Do the employees get paid?

Alternative solutions for insolvent companies

 

What is the difference between winding up and liquidating your company?

It is a common misunderstanding that winding up a company and liquidating your company are the same thing. The reality is that they are two different stages in the process of company closure.

The steps taken in the process of liquidation focus’ on the selling off of the company assets in order to pay creditors and then the closure of the company. Winding up involves ending all business affairs and closure of the company which includes liquidation or dissolution (the whole process).

Some of the other terms that you may have come across in the process of winding up are explained below:

You Are Voluntarily Winding Up Your Company

Upon determination that the company will need to close the relationships and obligations of the company need to be dealt with and terminated. This process is usually started by the company directors and as so is a voluntary winding up.

Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be brought to a close (wound up). All the company’s affairs are put in order prior to closure (liquidation or dissolution).

My Company Has Been Served A Winding Up Petition

A winding up petition is different to a voluntary winding up, this is a forced procedure when someone is owed money.

A Winding Up Petition is submitted to the court by a creditor of a company once they have failed to collect a debt owed to them by your company. Should the petition be granted by the court, the company will then be investigated and liquidated by the Official Receiver.

The Official Receiver will make it their business to conduct a very intrusive investigation into whether any misfeasance or wrongful trading has been conducted.

 

What is Liquidation, what happens?

Liquidation is the process of selling a company’s assets to turn them into cash which can then be distributed out.

Once it’s been decided that a company has to close, all long-term relationships have been severed, and obligations have been dealt with, the business’ assets are liquidated and according to UK law, this must be handled by a licensed Insolvency Practitioner. Here is where it gets a bit tricky.

If the business is solvent and all debts are satisfied, the proceeds are distributed among members (shareholders and directors etc.). If the company is insolvent, the top priority is paying off creditors even if there is nothing left to be distributed to members.

Whilst it is true that some of a company’s assets may be liquidated during the winding up stage, it is usual for such things as equipment and the building and/or land to be liquidated once winding up is complete.

Only a professional Insolvency Practitioner (IP) is qualified to liquidate a company’s assets due to the complicated and specific nature of UK law and the variables involved.

 

 

Should I choose a liquidation to close my limited company?

If there are assets to be distributed, then the answer would usually be yes. Although the liquidation process is designed to benefit company creditors, don’t let this put you off – all insolvency procedures are geared this way, but it doesn’t mean that liquidation won’t benefit you as a director also.

Directors who are wary of liquidator’s investigations (in fear of misconduct accusations) will benefit from entering the liquidation process voluntarily.

This is because they have been proactive and taken action rather than waiting for a creditor to do so.

However, if there are no assets to be distributed or no funds in the company to pay for a liquidation then Administrative Dissolution may be the best solution. See below.

 

The two types Liquidation – the legal definitions

Once you have made the decision to liquidate your company you need to be aware of the two types of liquidation. Understanding the difference between the two is very important.

 Members’ Voluntary Liquidation (MVL)

A Members Voluntary Liquidation is used if your company is financially solvent (can pay of all the money it owes).

Creditors’ Voluntary Liquidation (CVL)

A Creditors Voluntary Liquidation is used if your company is unable to pay its creditors.

 

Members’ Voluntary Liquidation (MVL)

Having taken the first steps in the process the directors need to make a ‘Directors Resolution’. This is particularly important if the directors decide upon a Members Voluntary Liquidation as the directors will be asked to sign a Declaration of Solvency.  Should anything be deemed false on the declaration, the legal consequences can be quite severe.

Utilising the services of a licensed Insolvency Practitioner (IP), the directors can draw up the necessary documents in which they swear that the company is, indeed, solvent and can be expected to have the financial ability to pay debts within a 12 month period of the expected liquidation date.

Once the directors have sworn the declaration of solvency in the presence of a solicitor the declaration is sent to Companies House.

Once the directors are believed to have made a full enquiry into the company’s financial affairs and the company is in fact solvent, the first step in winding up a company is to hold a meeting of the board.

After this, there are several steps leading up to liquidation and striking a business off the register.

The process is generally followed as outlined below:

• Meeting of the Board of Directors to resolve to draw up a Declaration of Solvency
• Extraordinary General Meeting of shareholders with 14 days notice
• Liquidator/IP is appointed and will handle statutory filings and notices
• All taxes are prepared and filed throughout the winding up process through to liquidation
• Assets are liquidated per schedule
• Shareholder meeting for the final report

Whilst it is not a legal requirement to appoint an IP prior to liquidating a company, UK law is very specific so it is prudent to consider appointing one for their expertise at this point.

Since the process for winding up a solvent and insolvent company are quite similar, UK law recognises the expertise of Insolvency Practitioners and they are the only professionals allowed to be liquidators.

 

Creditors’ Voluntary Liquidation (CVL)

If the company is insolvent or the majority of directors cannot agree on a Declaration of Solvency, winding up would utilise a Creditors’ Voluntary Liquidation procedure.

A CVL is quite similar to an MVL in terms of timings, schedule and statutory filings, but the emphasis throughout a CVL is on the creditors.

However, after all the assets have been liquidated and creditors repaid, there may be nothing left to distribute to shareholders.

On occasion, even when the majority of directors have signed the Declaration of Solvency, they may find out later in the process that the company was not in fact solvent.  In a case such as this, MVL would automatically become a CVL.

The main difference being that there must be a meeting with the creditors in a CVL since the company is insolvent and cannot pay off its debts.

 

Taking advice from accountants on an insolvent company

Please be aware that your accountant may not be an insolvency expert.

Although they may be a trusted individual, friend of the family, have always been on your side and know their stuff when it comes to business, their insolvency advice should still be taken with caution.

Unfortunately, we come across a high number of cases in which the director of an insolvent company has been advised wrongly by their accountant and come under fire as a result of this.

Just know that however knowledgeable your accountant is, unless they have come from an insolvency background, they will not be familiar with the insolvency legislation and therefore are not in a position to advise you regarding your insolvent company.

Furthermore, if it is later discovered that the company has been trading whilst insolvent (or conducting any other misfeasance), it is not the accountant at risk of personal liability, but the director.

As a rule of thumb, if you have an insolvent company and it no longer seems to be viable without your personal situation being affected, then it needs to close.

You would be surprised how many limited company directors we have come across whose accountants have advised them to take out personal loans to pay company creditors!

 

How much does it cost to liquidate a limited company?

Company liquidations must be carried out by a licensed insolvency practitioner (IP). The use of any professional’s time has a cost implication. The exact cost differential for a liquidation between one practitioner and another is hard to quantify but usually the cost to liquidate is between £2500 to £6500. Ultimately all costs depend upon the company situation.

Insolvency is a process designed to benefit the creditors of a company’s interests. The legislation built up concerning this area ensures that the complex issues of this aim to benefit the creditors is addressed.

The difficulty of the situation dictates that an IP comes at a high price but the IP needs to make many complex and impactful assessments. All assets and liabilities of the company need to be assessed; once processed the assets need to be sold at market value. This pays the IP’s fees and allows for a disbursement to the unsecured creditors.

The fees must factor in the need of the IP to usually have a team of people working in the background. The team will take all the heavy lifting out of the process for instance filing and collating records.

Of course, the more complex the case the more people are needed to help. The demands of time and allocation of skilled people means that the IP’s fee often seems high until the complexity of the issue is examined.

 

Note – Finding the cheapest liquidation

A common situation that we come across is that directors take our advice and then search elsewhere for a cheaper liquidation quote.

Of course, we offer non-obligation advice because we fully support individuals exercising their right to shop around in a competitive market. However, please be clear of your terms before you sign on the dotted line.

Unfortunately, there are liquidators out there who severely under-quote for their services in order to take instruction on for further gain down the line.

Some see large asset lists or the fact that the director is in a positive financial situation and use this to their advantage later on by charging hidden costs.

We value transparency and decency; we’re not here to catch people out but solve their problems.

Our panel of insolvency practitioners look after our clients, because if they didn’t, we would not be working with or recommending them.

We have come across many who have been enticed by a cost that looks very low, but later find that they end up paying far more out of their personal funds.

By the time they have come back to us, it is too late; please just be aware of the practitioner’s intentions, whichever path you choose. We would be happy to provide you with a few choice questions to ask.

 

How long does it take to liquidate a limited company?

A liquidation can be done in as little as a month however, in practice it depends on the case, some can take 3 months, 6 months or even longer.

If there are a lot of assets to be realised and sold for example the process could take a lot longer, in some cases in could even take a couple of years.

In any case it is important to realise that the way to ensure a liquidation is done as quick as possible is to get all the paperwork compiled as quickly as you can. Working with the insolvency practitioner is the key, you must aid the process.

You will need to cooperate with the practitioner completely once you have made the decision that they are the right party to deal with the company for you.

For a CVL (Creditors Voluntary Liquidation), the initial appointment process is probably the most laborious part for the director due to the information that needs to be provided by them – this part usually takes 1-2 weeks.

90% of shareholders must agree to a short notice process, and if this is approved then the company can enter liquidation within 7 working days (this is the minimum notice required for company creditors).

More typically, this part will take 2 weeks. However, the date is relatively flexible to the end that all of the necessary information needs to be collated before this point.

Once the practitioner has been approved, their work really begins; asset valuation and sale will be processed, and the necessary inquiries carried out.

The paperwork required from the practitioner is not to be underestimated; these parts could take 1-2 years or even longer. The bigger the company with regards to assets and creditors, usually the longer the liquidation will take.

In the case of a compulsory liquidation (or winding up order), the time up to the court proceedings is usually around 3 months. In both cases, however, this is just the time that it takes to approve the liquidation.

3 months to 3 years can be added to this time to liquidate assets, agree creditors’ claims and distribute any available funds.

No time limit has been legally applied to company liquidations – usually, it takes between 6 to 24 months for the liquidation process to be completed. This, of course, depends on the form of liquidation, the company’s size and its position.

The liquidation may take longer if the Insolvency Service chooses to investigate the possibility of fraudulent or wrongful trading. There is a possibility of personal liability if a director has acted improperly with regards to the creditor’s interests. However, avoiding liquidation will not negate this fact, but make the situation worse further down the line.

 

My company is insolvent but has no funds to liquidate?

What Can I Do If My Company Has No Funds Or Assets?

1. If your company has no debts

If you simply want or need to close down the company, and there aren’t any debts or any assets to liquidate, then you can dissolve the company and have it struck off the Companies House register. How to dissolve a limited company.

This process can typically take about 3 to 6 months and you’ll need to put together and present cessation accounts in order to do this.

NOTE. If your company does have assets then, depending on the amount, a Members Voluntary Liquidation may be the best route to use.

 

2. If your company does have debts

If the company does have debts but no assets then there is another route that can be used, which clears any debts and allows for the company to be closed, this is called Administrative Dissolution. It has the same effect as a liquidation but usually costs far less.

The Administrative Dissolution process is based on the benefits of using Sections 1003 to 1008 of the Companies Act 2006 (formerly Section 652 of The Companies Act 1985) which are available to limited companies.

If you follow this route you should ensure that all creditors are informed and the financial position explained to them. You should also invite the creditors to petition for the winding up of a company.

You will also need to make sure that you inform all shareholders, directors, employees and trustees of any pension fund.

The benefit of Administrative Dissolution is that you have addressed your statutory duties of informing your creditors of the financial position and, as you have also reported the matter to the Registrar of Companies, you can’t later be personally fined by the Registrar for any later failure to deliver accounts and annual returns.

The main downside is that the process has to be carried out correctly with paperwork etc. being filed on time and in the correct order.

 

Also, it is especially important to be careful about your actions and accounts when you realise your company is trading whilst insolvent.

For example, if you attempt to sell off all assets in an independent sale for a price that is far below market value you could be accused of wrongful trading.

In addition, you shouldn’t take out any credits or loans while the company is insolvent, as you may be held personally liable for these debts if you are found guilty of wrongful or fraudulent trading. You can read more about this here.

 

Funding the liquidation personally

If you are in a position to personally fund the liquidation, this option can be taken. When there are no other options, it is common for directors to fund liquidations by selling their personal assets.

We must re-iterate that this is only recommended by Forbes Burton when there are no alternatives. After all, limited entities are legally separate from their directors and employees for a reason; to protect the associated parties from becoming affected personally when things go downhill.

However, by choosing to take on the direction of a limited company, individuals do undertake certain obligations. Fulfilling these will lessen the chances of personal liability in the future, especially if your plans are to continue within another entity.

Our Insolvency Practitioners pride themselves on being flexible and understanding the difficult positions that directors are often in when they first contact us. For this reason, they are able to offer payment plans to those that require them.

You can read more about liquidating a company with no assets or money here.

 

 

Limited company liquidation, the liquidation process at the beginning step by step.

What is the process of liquidating a company?

1. Appointment

• Firstly, an Insolvency Practitioner (IP) will need to be informally appointed; this is the liquidator who will be in charge of the whole process.
• They will gather the information that they need from the director, including company accounts, records, and also creditor, asset and cash flow information.
• This information will be organised and official documents will be written up.
• An assessment of the Statement of Affairs could be included here.
• If the company is entering an Member’s 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 London Gazette (which is now solely an online publication).
• This is mandatory for all companies that are proposing closure, in the interest of creditors; it enables them to submit their claims to the correct party.

3. MOCs (Meeting of Creditors)

• Next, creditors are corresponded with. They must be given a certain period of time to respond…
• They will either be notified at least 7 days before the creditors meeting, or given notice that unless they object to the process it will be going ahead.
• Please note; Until very recently, physical creditors meetings were required, but this process can now be done virtually; it is down to the liquidator which path they will take, but increasingly, virtual meetings will now become the norm.
• Deemed Consent; It is now possible for liquidators to assume that creditors consent to the liquidation unless they have objected to the process. This is referred to as ‘deemed consent’. See our blog post on the recent changes here.
• If creditors meetings are held (virtually or otherwise), the intended IP will lead the meeting, although the company Director is technically the chairman.
• These meetings are usually completely stress-free; creditors will vote to confirm that Liquidating the company is it’s best option, and that the liquidator can be officially appointed.

 4. Liquidation of assets; if any exist.

• The term liquidation actually refers to the sale and disbursement of the company assets i.e. turning something physical into ‘liquid’ cash, selling off equipment etc.
• The firm’s assets will be sold at their highest possible value, and the cash will be used to pay off any company liabilities including the IP’s fee..
• Usually, items will be auctioned, but it is possible for Directors to buy the assets themselves. However, the price must match that of an independent valuation, and this must be deemed to be in the best interests of the creditors.
• After the assets have been sold, the cost of the Liquidation will be paid, and creditor claims will be settled.

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

• An instalment agreement would be drawn up.
• The IP takes on instruction on the understanding that a proportion of the director’s redundancy claim would be used to fund the liquidation when the payment has come through.

 

How would putting my company into liquidation affect me?

In the vast majority of cases, there is no effect on company directors.  Of course, it will technically be public knowledge that you were once a director of a company that is now in liquidation, but this would only be 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.

There are, of course, exceptions; you will have heard the horror stories of personal liability and disqualification, but if any problems are going to arise, our job is to pinpoint them beforehand, and we will advise the appropriate action.

 

Priority of claims from creditors

Part of the Liquidator’s duties involves addressing the priority of creditor claims during the insolvency process. You can read more about who gets paid and in what order, including how employees are addressed.

 

Do the employees get paid?

Wages, wage arrears, holiday pay and notice pay are all covered up to certain statutory limits by the Redundancy Payments Office of the Department of Trade and Industry.

 

Alternative solutions for insolvent companies

If you are thinking of liquidating a company due to financial problems, you should take the time to compare all of the available options. There are other types of action that may be a better solution to companies in financial difficulty, you could consider exploring these before you decide to close the company via liquidation, especially if you would prefer to keep trading.

If you do want to keep trading you may find that options such as a Company Voluntary Arrangement (CVA) or Administration will be a better option for your company. Insolvency procedures such as CVAs and Administration can be useful ways of restructuring a private company, these options also require a licensed insolvency practitioner to handle the process.

 

The Next Steps

We have free resources for you to read further about everything we have talked about. Please refer to our free resource section  https://www.forbesburton.com/free-guides

Our expert staff are ready to take your call during working hours, if you need to talk then please call us for a free, no-obligation chat to discuss the best option for you 0800 975 0380