What happens to company money and assets during Liquidation?

How are the retained profits distributed and who receives the proceeds?

When a company enters Liquidation, it will usually have assets such as property, machinery, vehicles and stock that the liquidator will sell before closing the business. It may also have cash in the company bank account. Once the liquidator has sold the assets, they will distribute the proceeds plus any retained profits to the company’s creditors or shareholders (depending on whether the company is solvent or insolvent). They’ll then strike the business off the Companies House register and it will cease to exist.

How are company assets sold in Liquidation?

When you enter liquidation, you must appoint an Insolvency Practitioner to act as the liquidator. One of their main jobs is to independently value the assets and sell them so they can distribute the funds before closing the company down. When the assets are valued, the valuer will set a realistic price given that the assets are being sold out of Liquidation. 

The liquidator will usually sell the assets to unrelated third parties at auction. However, you may have competitors who are interested in the assets or a company director who wants to buy some or all of the assets so they can use them for a future endeavour. The transaction will be allowed to go ahead as long as the price they pay meets the independent valuation.

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What kind of company assets are sold in Liquidation?

Anything the business owns that has not been used as collateral in a finance agreement can be sold for the benefit of the company’s creditors or shareholders. That includes tangible assets such as buildings, land, machinery, equipment, stock, computers, office equipment, and fixtures and fittings. 

The liquidator can also sell the business’s intangible assets, such as intellectual property, domain names and the company’s work-in-progress. Although it can be more difficult to value assets of this nature, they can still be marketed and sold.

If you have used an asset as collateral to secure a finance deal, the lender can take possession of that asset and sell it to recover the debt. If the amount they recover is greater than the value of the debt, they must return any surplus to the liquidator for the benefit of the company’s creditors or shareholders. 

What happens to company money on Liquidation?

When the liquidator takes control of the company, they will transfer any money in the business’s bank accounts into a liquidation account they control. They will also collect any payments due from company debtors to maximise the return for the creditors and shareholders. That money, along with the funds raised through the sale of the company’s assets, will be used to cover the cost of the Liquidation and repay the creditors. Any remaining funds will then be distributed among the shareholders.

Who receives company money and assets on Liquidation?

Who benefits depends on whether it is a solvent or insolvent Liquidation:

Solvent Liquidation

If you want to close a company that can pay its debts, you can enter into a Members’ Voluntary Liquidation (MVL). An MVL is a method of closing a solvent company while extracting the cash and assets at a lower rate of tax. Once the liquidator has sold the assets and repaid the creditors, they will pay the proceeds and any retained profits to the shareholders. 

The shareholders will pay Capital Gains Tax rather than Income Tax, which could put more money in your pocket. You may also be eligible for Business Assets Disposal Relief, which reduces the tax you pay on all qualifying assets to just 10%. 

Insolvent Liquidation

If your company cannot afford to pay all its debts, you can enter into a Creditors’ Voluntary Liquidation (CVL). In this process, the liquidator sells the business’s assets, takes control of company bank accounts and pays the proceeds to the creditors in a defined order:

1. Secured creditors - Creditors with a registered charge against company assets are the first to be paid. That typically includes banks and other commercial finance providers.
2. Preferential creditors - Next in line for payment are the preferential creditors. Examples of preferential creditors are employees with unpaid wages and holiday pay, and PAYE and VAT debts owing to HMRC.
3. Unsecured creditors - The final group is usually the largest pool of creditors. It can include landlords, trade suppliers, utility providers and customers who paid for services and products that were not delivered.

The liquidator must pay each group of creditors in full before moving on to the next. Unfortunately, that means by the time they get to the unsecured creditors, it’s often the case that there’s little or no money left, so they only recoup a small proportion of the money they are owed. 

Once the liquidator has distributed all the money, they will strike the business off the Companies House register and it will cease to exist. At this point, any debts that remain unpaid will be written off. 

What happens to your personal assets during Liquidation?

The legal structure of limited companies and limited liability partnerships means that your creditors cannot pursue you for debts the company cannot pay. However, there are certain circumstances when your personal assets could be at risk. 

If you act wrongfully or fraudulently when running the business, sign a personal guarantee for a company debt or have an overdrawn director’s loan account, you could become liable for some or all of the business’s debts. If you cannot pay what you owe then your personal assets, including your home, could be at risk.

Need advice?

If you have any questions about the solvent or insolvent Liquidation procedures or are worried about your company’s future, we can help. Contact our Insolvency Practitioners for a free, no-obligation consultation or arrange a meeting at one of our offices throughout the UK.