Liquidation

If your business faces liquidation you no doubt have many questions, worries and concerns.

We specialise in advising and helping small business owners in all aspects of company liquidation.  If there is no option except liquidating your company we have fully qualified and accredited liquidators who can deal with the liquidation process. 

You’ll find that we are highly experienced, practical, empathetic and as we specialise in dealing with small and medium businesses, our fees are proportionate and affordable. Please do get in contact

Liquidation is a commonly used term in business law, finance and economics for liquidating a company.

See below for all the information you need about company liquidation, in terms of process, timeframes and potential costs.

What does Liquidation Mean?

The term ‘liquidation’ refers to the process of closing down a company and distributing its assets.

Under UK law, liquidation is a formal procedure, in which a limited company is closed down by an appointed licensed insolvency practitioner (liquidator).

Liquidation means the company’s assets are sold (liquidated) and any realisation of revenue is redistributed in order of priority amongst creditors and/or shareholders.

The final stage of the process is where the company has been finally liquidated, which is when the the company is removed from the  registrar of Companies House and ceases to exist legally. 

Liquidation can be used to close both solvent companies (those that can pay their debts and/or where assets are greater than liabilities) and those which are insolvent (bankrupt).

The laws surrounding company liquidation in the UK are primarily defined by the Insolvency Act 1986.

What Happens When a Company Goes into Liquidation?

When a company goes into liquidation, it ceases to trade, staff will be made redundant, and the company will cease to exist as a legal entity.

As a director, your powers will cease, and you’ll no longer be able to access business bank accounts.

For solvent companies, liquidation is a tax efficient choice for businesses with assets to dispose and no debts.

If you’re insolvent (in debt), a licensed insolvency practitioner will organise the liquidation of corporate assets, and the proceeds are then distributed to the company’s creditors

Finally, the company will be struck off the register at Companies House. The company has been liquidated and will no longer exist.

Different Types of Limited Company Liquidation

The liquidation of a company can be done in 3 different ways. All require the assistance of a liquidator.

The voluntary liquidation procedures, Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) are initiated by the shareholders and directors.

The compulsory procedure is initiated by creditors like HMRC via a court order.

Read more on all 3 types below.

Creditors Voluntary Liquidation

A Creditors’ Voluntary Liquidation (CVL) used by insolvent companies and is initiated by a shareholders’ resolution.

This involves the closure of the insolvent company and the redistribution of any assets to the creditors. This procedure means unsecured business debts of the company that are not personally guaranteed get written off.

Members Voluntary Liquidation (Solvent Liquidation)

A Members’ Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent UK company and can be used as part of an exit strategy.

A solvent liquidation may be considered if you have a company that you want to close as part of your business plan and reduce taxation. MVL’s allow you to pay less capital gains tax (at 10% on all qualifying assets)

Your company may have outlived its purpose and be heading towards a natural end of trading, or you may wish to extract the value of cash and assets from the company in a tax efficient manner.

The insolvency practitioners will realise business assets at fair value, before dissolving it.

Compulsory Liquidation

Compulsory liquidations are initiated by a creditor to force a business that cannot pay its debts into closure via a court liquidation process. Most commonly, the creditor is HM Revenue & Customs (HMRC), however, it can be initiated by any creditor owed more than £750.

The compulsory process begins with a winding up petition. Once it is heard at court, it can become a winding up order.

This procedure is often used to wind up your business as a last resort by creditors after failed negotiations over missed payments.

After a Winding Up order the insolvency procedure is usually handled by the Official Receiver or appointed liquidator. 

The conduct of the directors is reported back to the UK Secretary of State at the end of the liquidation proceedings and failure to co-operate with the Official Receiver can have serious repercussions.

Liquidation Process

The Liquidation process is as follows:

1. An Insolvency Practitioner is appointed as Liquidator.
2. Directors’ powers cease and the IP takes over the management of the company’s affairs.
3. The company’s assets are then assessed and realised (liquidated).
4. If there are any creditors they are then paid in order of priority.
5. Any surplus money (only really applies with a solvent liquidation) is distributed to the shareholders.
6. The company is finally liquidated and struck-off the registrar of companies (Companies House).

How long does Liquidation take?

There is no set time-frame to liquidate a company and with several variables dependent on each case, timeframes will vary widely.Generally voluntary liquidation is faster than compulsory liquidation.

The complete liquidation process itself can take anywhere between 3 months and 1 year on, depending on factors such as whether the company is big or small.

Priority of Claims

Who gets paid first in a liquidation? This is decided by what is called the ‘priority of claims.’

You can read more about who gets paid and in what order , including how employees are addressed.

Briefly, the order is as follows:

• Any secured creditor
• Expenses incurred by the insolvent estate
• The insolvency practitioners
• Preferential creditors (which include employees and now HMRC)
• Unsecured creditors
• Shareholders

What Happens to Directors?

The most important thing for directors to realise when liquidating a company is that their responsibilities undergo a marked shift if the business becomes insolvent.

Once insolvent, the company’s directors must prove they have acted in the best interests of the creditors. To avoid the risk of personal liability, it is important that directors act responsibly and take professional advice, immediately.

Directors should be aware of the fact that once an Insolvency Practitioner is appointed, they will have a responsibility to investigate the actions of company directors during the period preceding the liquidation.

Principally, the liquidator looks for clarification that, as soon as the director became aware of the situation he/she put the interests of creditors first. Where this is not the case, the director becomes open to charges of wrongful or fraudulent trading .

In cases where this can be proven, the director may become personally liable for some or all of the company debts .

Costs & Fees of Liquidating a Company

How much does liquidation cost?

The average liquidation of a small business in the UK costs around £4,000 to £6,000 + VAT, however, this can vary dependent on a number of variables such as the size of the company and volume of creditors.