What does liquidation mean?
Liquidation is a type of insolvency procedure that brings a company to an end and is where all of the company’s assets are sold to pay the creditors. Once the company’s assets are sold and the creditors are paid the company will be dissolved, it will be removed from Companies House and it will no longer exist as a legal entity. If the money raised from selling the assets is insufficient to pay all the debt then the remaining debt will be written off at the point when the company is dissolved.
There are three main types of liquidation which are Creditors’ Voluntary Liquidation and compulsory liquidation for insolvent companies, and for solvent companies Members’ Voluntary Liquidation.
Liquidation should only be entered into as a last resort where possible as other options might offer better outcomes and could save the business. An insolvency practitioner should be consulted as they can assist you in weighing up the possible options available to you which could include administration, financing or selling the business.
What happens when a company goes into liquidation?
When a company goes into liquidation either the directors or the court, in the case of compulsory liquidation, will appoint an insolvency practitioner to manage the liquidation process. Once appointed the insolvency practitioner will take control of the business and close the business down. They will be responsible for communicating with the creditors and regulatory bodies to ensure that the liquidation is completed fully and efficiently.
They will seek to gain as much funds as possible from the company’s assets to pay the company’s creditors. During the liquidation process, the creditors will be put first and it will be them that receive funds from the business first. The insolvency practitioner will sell off all the assets and settle the business’ debts in order of creditor type with secured creditors being paid first.
The insolvency practitioner will inform Companies House that the company has been liquidated. They will also investigate the reasons behind the insolvency to see whether any wrongdoings resulted in the company failing. If they find wrongdoings it will be documented in their report to the Insolvency Service. The Insolvency Service can apply for a Court Order to ban the directors from being a director in another company for a fixed period of time which could be from two to 15 years. This will be recorded publicly and will be searchable in their records.
Who oversees a liquidation?
Liquidation should be overseen by a professional insolvency practitioner that will either be appointed by the company or by the court in the case of compulsory insolvency where a creditor has applied for a Winding Up Petition.
The insolvency practitioner once appointed will take control of the company and assess its assets to realise as much value from the business as possible. The insolvency practitioner will work in the interest of the creditors and will aim to get the best for them out of the process.
What are the business liquidation costs?
The costs of liquidating your business will vary depending on the complexity and nature of the insolvency process. The cost to the business or the directors will vary depending on which type of insolvency process is entered into.
For Creditors’ Voluntary Insolvency, the directors of the company are expected to pay the liquidation fee. Where a creditor takes legal action in the form of a Winding Up Petition, the creditor filing the petition will have to pay the liquidation fee which can be around £1,490-£1,990.
On top of this, there will be costs to pay to the insolvency practitioner for completing the liquidation process on your business’ behalf. The cost of this can vary from £3,000 to £7,000 depending on your business circumstances and assets. The directors of the company are responsible for this fee being paid and if the assets can’t cover this, they are personally liable for this amount.
If you go through Members’ Voluntary Liquidation it can be an advantageous way of closing down a business if you have significant funds to release from it as it can be a tax-efficient method. Generally, this applies if you have over £25,000 to liquidate from the business, if you have less it can be more costly than the benefit gained. It is worth seeking out advice and an estimate first, but you can expect it to cost from £2,000 for a straightforward case.
What happens to employees when a company goes into liquidation?
Unfortunately, when a company goes into liquidation it ceases trading immediately and the employees are immediately dismissed. Employees can claim for any unpaid wages, accrued holidays, overtime, commission, notice pay, and redundancy pay.
Where there are sufficient funds within the company the employees will receive these payments from the company, but where there are not enough funds the payments will come from the National Insurance Fund. These claims need to be made through the Insolvency Service and more details on how to do this can be found here.
What is Creditors’ Voluntary Liquidation (CVL)?
Creditors’ Voluntary Liquidation is a voluntary liquidation process that is done in mutual agreement between the shareholders or directors to liquidate the business. This decision is normally taken when the company has become insolvent and there is little chance of turning the business around. The decision shouldn’t be taken lightly, and you should consult an insolvency practitioner that can help you to assess your options before taking irreversible steps.
However, by taking this step responsibly it can work in your favour as it will show that you acted in the interest of your creditors which will help when you are investigated to see if there were any wrongdoings. When companies wait then go into compulsory liquidation it can reflect badly on the directors.
Once you have decided to proceed with liquidation, will need to appoint an insolvency practitioner. By deciding to go into insolvency and by selecting your insolvency practitioner, you will have more control during the process. The insolvency practitioner will take over in handling the business’ affairs and ensure that it is wound up in a timely and efficient manner.
The insolvency practitioner fees will be taken from your business’ assets if there are sufficient funds, if there aren’t sufficient funds it will be the responsibility of the directors to pay the fees.
What is compulsory liquidation?
Compulsory liquidation is where one of the creditors petitions for the business to be put into liquidation due to the level of money owe to them. In these circumstances, the creditor will have made attempts to get their money from the company unsuccessful and have exhausted other routes before applying for a Winding Up Petition. The reasons why this a last resort for most creditors is that it incurs a cost for the creditor for the petition.
If the court grants the Winding Up Petition, the company’s bank account will be frozen, and the company will be forcibly wound up. A receiver will be appointed by the court to handle the company’s affairs and wind up the business. The receiver will establish what assets the business has that can be liquidated and will sell these assets for the best price possible for the benefit of the business’ creditors.
The receiver will also investigate the handling of the business to see whether there have been wrongdoings that led to the insolvency of the business, which could lead to a director being banned from being a director of another company.
What is Members’ Voluntary Liquidation?
Members’ Voluntary Liquidation is designed for solvent companies who want to close their business as it is no longer viable, or the directors no longer want to run the business such as to retire. It is a formal method of closing a business and will allow the directors to access the profits that are tied up in the business.
The main reason that companies use Members’ Voluntary Liquidation is because it offers a tax-efficient way of releasing funds from a business. Funds released in this way are treated in tax terms under Capital Gains Tax rules rather than Income Tax so less tax will be paid, and the recipient can also apply for entrepreneur’s relief that can reduce Capital Gains Tax to 10%.
There are costs associated with Members’ Voluntary Liquidation which mean it is only a viable option for businesses with funds over £25,000 to liquidate.
What are the benefits of business liquidation?
Although no business wants to go into administration, there are still some advantages which include:
- Putting an end to the pressure and stress of managing a company that is in financial difficulty.
- Places control of the business in someone else’s hands and they will communicate with your creditors on your business’ behalf.
- It can allow directors to draw a line under the business and move on to new ventures, and as long as no wrongdoings are found they can go on to run other companies.
- Deciding to go into Creditors’ Voluntary Liquidation will allow you greater control of the liquidation process and will reflect more favourably on the directors when an investigation takes place looking at any wrongdoings.
- Members’ Voluntary Liquidation can be a tax-efficient method of closing down a business and accessing funds from it.
- Debts are written off.
- Leases can be cancelled.
- Legal action is ended, and court action can be avoided.
- Employees will be able to claim redundancy.
What are the disadvantages of business liquidation?
There are unfortunately disadvantages of going into liquidation which you may expect, and these include:
- If you choose to voluntarily liquidate your business it will be more expensive for the directors as they will need to pay a fee. If a creditor or HMRC puts the business into compulsory liquidation, the petitioner must pay the liquidation fee which is approximately £1,490-£1,990. In a voluntary liquidation, the cost of appointing an insolvency practitioner is also the responsibility of the directors which can range from £3,000 to £7,000 depending on the complexity.
- An investigation will take place examining the reasons behind the insolvency as it is a requirement on insolvency practitioners. It will look to see if there were any wrongdoings by the directors that resulted in the insolvency and if found that they didn’t act in the best interest of the creditors they can be banned from being a director. A ban can last from two to 15 years.
- There is a chance of personal liability and reputational damage if you as a director are found of wrongdoing which can impact your ability to perform director roles and be recruited into roles.
- Loss of brand and company reputation that has been painstakingly built up over the years is lost overnight. If the company can be salvaged or sold it would save the brand and reputation rather than lose it all.
What is the difference between liquidation and administration?
Administration and liquidation are actually different types of insolvency processes that business can go into on a voluntary or compulsory basis. There are key differences though between these two insolvency processes.
Administration is an insolvency process that has different aims to liquidation as the process will try to save the company wherever possible rather than close it. The administration process includes a period of reflection to allow the administrator to assess the options available to the business and whether the business could become viable again. The outcome from administration could be to negotiate a Company Voluntary Arrangement (CVA) to allow the company to continue trading, to sell the business as a going concern, or to go into Creditors’ Voluntary Liquidation. During the administration process, there is a period where the company will have breathing space where they can continue to operate without the threat of legal action from their creditors as administration protects you from this.
Liquidation is designed for companies that are no longer viable and are insolvent, and therefore have no other option other than closing and liquidating to pay their creditors.