What does liquidating a company mean?
A liquidation is where the assets of a company are sold to generate cash. There are two main types and it depends on the situation of the company as to which is the right one to use.
1. Creditors Voluntary Liquidation (CVL):
A Creditors Voluntary Liquidation is used when a company is insolvent (can’t pay its debts as and when they fall due) and:
- has assets that can be sold to generate cash
- owes money to people
2. Members Voluntary Liquidation (MVL):
A Members’ Voluntary Liquidation is used when your company is ‘solvent’ (can pay its debts) and:
- you want to retire
- you no longer need or want a company
How does a Creditors Voluntary Liquidation happen?
A CVL is initiated by the directors or shareholders of the company who have determined that it is insolvent and cannot continue to remain in business anymore.
CVL proceedings are handled from start to finish by an appointed Insolvency Practitioner.
During liquidation of a company, you have many clear-cut roles and responsibilities. These may include helping in tracing the firm’s assets, reaching out to outstanding creditors, and making sure that the organisation has formally shut down and its name is deleted from the company’s house register.
At the end of the procedure, everyone on the staff will be dismissed, and the organisation will no longer exist as a legal entity.
If there are any outstanding financial obligation at that point, they will be wiped off unless it is secured by a personal guarantee (PG). Once PGs are granted, they are embodied in liquidation and the responsibility to repay these loans rests with the person who provided the PGs (usually the company’s chief executive officer).
How can a company be put into liquidation?
There are 2 ways by which a company can be placed into liquidation:
- Executives and/or shareholders of a corporation can act independently.
- A bankrupt firm could additionally be ordered to be dissolved by a court of law.
A forced, also known as compulsory, liquidation usually represents the outcome of creditors launching a petition against the business for unpaid obligations.
Voluntary liquidation of creditors is a way to liquidate a company that is insolvent. It is called “voluntary” because the directors/shareholders of the company decide to do it when they believe the financial problems are beyond fixing.
While it may not be the preferred option, using an insolvent liquidation process like a CVL can often be the best thing for a company, its employees, and creditors that are struggling to stay afloat.
While it is true that nobody sets out to run a business with the expectation of failure, this option can effectively address the financial challenges being faced by a company which are unlikely to be resolved in the future.
In a situation like this, the sooner a company files for insolvency, the better.
Why would I willingly put my firm into liquidation?
You have specific legal duties as the head of operations of an insolvent business. One of these is that if you realise the company is insolvent, you must work to safeguard outstanding creditors, which involves putting their interests ahead of your own or those of your fellow executives or stakeholders.
In practice, this means you must refrain from engaging in any conduct that might exacerbate creditors’ positions or extend their financial losses.
In many circumstances, this implies you must stop trading immediately, while there may be times when it is found that continuing to conduct operations in an insolvent firm may be beneficial for creditors if it increases profits.
If you suspect that your company is heading towards bankruptcy, your best bet is to quickly seek the advice of an experienced insolvency specialist. The process of voluntary liquidation of creditors can be complex and challenging to navigate on your own, so it’s best to seek expert help.
Starting a CVL process for your company when you have determined that it is insolvent demonstrates your commitment to protecting the interests of your creditors and complying with the law. It is a responsible and ethical approach to the situation that can benefit all parties involved.
Not only that, but putting a challenged firm into liquidation may be a big relief, especially if you’ve been battling ever-more intolerant creditors and wondering about what the coming days bring for you and the people you employ.
Any debt that continues to remain unpaid (unless personally guaranteed) after a corporation enters a CVL will be wiped off. This implies that creditors will be unable to pursue you individually for the debt that remains.
Liquidation Frequently Asked Questions:
Is your company actually insolvent?
Sometimes it can be difficult to gauge if your business is Insolvent or not.
There are so many different opinions on the matter, yet, when it comes down to it, all you have to do is ask yourself:
“Can I pay the bills as they fall due?”
If the answer is ‘Yes’ then you are not Insolvent – if you still want to look at closing your business then it is a Solvent Liquidation (Members Voluntary Liquidation) or Dissolution that you’ll need.
If it is no then your business could well be considered to be Insolvent, and this means your responsibilities as a director changes.
Is a Creditors Voluntary Liquidation right for you?
For many businesses liquidation is the right solution for their situation. Whatever the cause of your problems, a Creditors Voluntary Liquidation is right if:
- Your business is long term insolvent (can’t pay it’s debts).
- You have no realistic way to repay your creditors.
- You would like to start another company debt free as part of a recovery procedure.
- There are enough assets or cash in the company to be able to fund the liquidation.
If there aren’t enough assets then you may be able to make a redundancy claim from the Redundancy Payments Office which can be used to cover the cost of a liquidation. If you can’t make a claim for redundancy then there is the option of Administrative Dissolution which has the same effect as a liquidation.
What are the benefits of Liquidation?
- You can start again with a clean slate.
- It doesn’t mean that you have to give up in business, for many directors it can be the beginning of something new.
- You aren’t liable for the unsecured debt, even tax debts owed solely by the company die with it.
- You are usually able to buy the assets of the company out of liquidation.
Is this a long term problem?
It is tempting to say that you could get a lot of sales in next week, and that will change the whole situation. It probably would as well, but ask yourself how likely is that to happen.
If you have a temporary cash flow problem then a Liquidation is probably going to be overkill, you would probably be better with a Voluntary Arrangement or an informal agreement with your creditors.
How much does a Creditors Voluntary Liquidation cost?
Usually a liquidation costs between £2,500 and £5,000+VAT, however, in a lot of cases it will end up costing the director nothing! Liquidations are funded by the sale of any assets in the company (if there are no assets then Administrative dissolution my be a better option, find out more here).
If a liquidation is necessary then it may even be able to be funded by a redundancy claim as explained below.
Can you claim for directors redundancy?
If you are a director of a limited company – which has been trading for over two years – and you are considering closing the company due to financial struggles (i.e. HMRC debts, creditor pressure, cash flow worries, potential insolvency), it is likely that you can claim for director redundancy payment.
The average UK claim is around £9,000 and this money can be used for any liquidation costs if necessary.
In addition, it’s likely you can claim for other statutory entitlements such as notice pay, holiday pay and unpaid wages.
If you do meet the criteria, claims can be made from the National Insurance Fund via the Redundancy Payments Service (RPS), and redundancy payments are tax-free. If you are able to make a claim we’ll help you with everything!
How do I choose the right company to liquidate my company?
Getting a professional team to deal with your company liquidation is the best way to make sure you have no problems in the future. This goes hand in hand with making sure you get the right Insolvency Practitioner to handle your particular case.
Many (not all) Insolvency Practitioners charge extremely low instruction fees for a Liquidation only to come after the Director, usually for overdrawn Directors Loan Accounts, after they have been appointed.
As independent insolvency specialists we work on your (the director) behalf to get the best outcome for all parties. We do this by selecting the best Practitioner for your situation from our extensive panel and then liaising with them and working to look after you.
We don’t charge you for this service (Insolvency Practitioner fees will apply for the actual liquidation).
Our ‘done-for-you’ liquidation service:
- Saves you time and hassle as we do as much of the work as we can for you
- Takes away the stress because we deal with all the paperwork and people you owe money too
- Could save you thousands of pounds by getting the right insolvency practitioner for your case
- Clears any outstanding company debts including HMRC tax arrears and loans
- Will see if you can claim up to £12,000 redundancy to pay towards the fees
So what are the steps involved in liquidating a limited company?
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Appointment
- Firstly, you’ll need to find an Insolvency Practitioner (IP); this is the person who will be in charge of the liquidation process. We can help you with this, making sure we can get the most suitable practitioner for your situation.
- 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 MVL (Member’s Voluntary Liquidation), a Declaration of Solvency will also need to be signed at this point.
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Gazette Publication
- The proposed 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.
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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.
- 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’.
- 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 to oversee the liquidation.
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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 will be sold at their highest possible value, and the cash will be used to pay off any company liabilities.
- 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 which case, either an instalment agreement would be drawn up initially, or the IP could even take 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 to get started
Does your company qualify for liquidation?
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