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Company Going Into Liquidation? What Happens and What Does It Mean?

Written by Keith Tully

Date: Monday 14th January, 2013

If your company is going to be liquidated, you will probably have some questions as to exactly what happens during the process. Actually, there are two ways a company can go into liquidation – voluntarily, in a company voluntary liquidation, or involuntarily, in a compulsory liquidation. During the liquidation process the assets of the insolvent business are sold and the proceeds are used to repay as many creditors as possible.

While the exact steps taken will vary depending on the type of liquidation, the affair generally involves the sale of all of the company’s property and holdings, followed by the complete dissolution and closing of the company. In other words, whether the liquidation is voluntary or compulsory, the end result will be the same. Creditors are paid as much as possible and the company ceases to exist.

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Keith Tully
Partner

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What Happens During a Compulsory Liquidation?

In a compulsory liquidation, a party lodges a winding up petition with the court to have the insolvent company wound up in order to recover the outstanding debt. The petitioning party may be a creditor, shareholder, Secretary of State, or an Official Receiver. The directors of the insolvent company can also legally lodge a petition to have the company wound up, but this is usually handled through a voluntary liquidation instead. If your company fits more than one of the following criteria then it could be at risk of being forced into compulsory liquidation:

  • Unable to pay debts as and when they become due
  • Total debts and liabilities exceed the value of all assets
  • Taxes owed
  • Number of company members has fallen below the statutory minimum prescribed
  • Has not commenced trading within the statutorily established time (typically one year) of incorporation
  • Has failed to re-register as a public or private company appropriately

After the compulsory liquidation is underway the process of selling the company’s assets begins, and all litigation involving the company usually ceases. In other words, any legal actions taken by creditors are considered void once the liquidation has begun.

What Happens During a Voluntary Liquidation?

The process of voluntary liquidation is generally less stressful because the entire procedure is well-planned and the company directors have access to the assistance and guidance of an insolvency practitioner throughout. As long as the necessary evidence/reasoning can be demonstrated to show the liquidation will provide the most appropriate outcome for the company’s creditors, then approaching a liquidator to wind up the company is pretty straightforward.

If, however the insolvency practioner finds that the companys' directors are wishing to liquidate their company despite there being more suitable solutions available, they may refuse to accept the appointment, in which case the insolvency practitioner would suggest more appropriate options.

Why Would You Initiate Liquidation Voluntarily?

When a company is in too much in debt to recover via recovery procedures like administration, financing, or a company voluntary arrangement (CVA), it may be time to accept that liquidation is the only course of action.

Postponing the process will only lead to a further in company debts, putting you at the director at an even higher risk of being held personally liable. Although directors are not normally held liable for the debts of a limited company, it is possible to be charged hefty fines and/or be ordered to pay specific debts if the court finds you guilty of wrongful trading. This is a very real possibility if you continue to trade insolvently without fulfilling your duties as a director. By voluntarily appointing an experienced insolvency practitioner to go ahead and take care of the process you can avoid most of the hassles and headaches associated with being wound up and forced into a compulsory liquidation by creditors and HMRC

If you’re facing the threat of a compulsory liquidation, or are considering a voluntary liquidation, feel free to call us on 0800 644 6080 today to take advantage of a free consultation with one of our knowledgeable insolvency practitioners.

Published in: Business Liquidation Bankruptcy

Keith Tully

Author
Keith Tully
Partner

Keith has been involved in Business Rescue since 1992, during which time he’s worked for both independent and national firms. His specialties include company restructuring matters and negotiating with HMRC on his clients behalf.

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