Updated: 2nd February 2021
When you liquidate your company it is struck off the register at Companies House and ceases to exist. All assets are sold, and the proceeds either go towards the company’s debts or are distributed to shareholders if the business is solvent.
There are three types of liquidation in the UK – two are voluntary processes and one is compulsory, but essentially the end result is the same for the company itself. As a director, it’s important to understand how each process works and the ramifications for you personally, particularly if you need to follow an insolvent liquidation process.
The process of liquidating a company is more or less the same for each type of liquidation:
Appointment of a liquidator
A liquidator is appointed to carry out the procedure – this will be a licensed insolvency practitioner (IP), sometimes appointed by the directors but in some cases chosen by the company’s creditors. In the case of compulsory liquidation, the Official Receiver may administer the process instead of an independent IP.
Realisation of assets
The liquidator sells the company’s assets and distributes the proceeds amongst creditors according to the statutory hierarchy for payment in insolvency. In the case of a solvent liquidation, the funds from sale are distributed to shareholders once creditor payments have been accounted for.
The office-holder informs Companies House of the situation, and the company is removed from the Register.
Liquidator’s investigation and report
For insolvent liquidations the office-holder reports on what happened to cause the company’s decline and informs the Secretary of State if anything untoward is discovered, such as wrongful trading or misconduct by a director.
So what are the two types of voluntary liquidation? One process is used when a company can’t pay its debts or the value of its assets is less than its total liabilities, i.e. it is insolvent, and the other procedure applies for companies that are solvent.
You might choose to liquidate your company via Creditors’ Voluntary Liquidation if you’ve entered insolvency and the situation isn’t likely to improve. Liquidating your company in this way obviously isn’t ideal, but by choosing CVL you’re protecting your creditors from further financial loss.
Creditors’ Voluntary Liquidation can also be a good option if you’re an employee of your company as well as a director, as you may be able to claim director redundancy. This is particularly relevant if you feel that you can’t afford the professional fees associated with formal liquidation, as the redundancy payment might cover part or all of the sum required.
Members’ Voluntary Liquidation allows you to close down your company in an orderly manner when it is solvent. An important part of this procedure is the Declaration of Solvency, and this needs to be signed by the directors.
The Declaration of Solvency confirms that your company is financially able to pay its debts within 12 months of closure, so this is an important document. The MVL process is commonly used by directors wishing to retire, particularly if there’s nobody to take over the business.
Forcing a company into compulsory liquidation is usually a last resort for creditors who have chased their debts unsuccessfully for some time, and typically believe it’s the only way they’ll receive any form of repayment.
As a director, you’ll face investigation by the Official Receiver or appointed liquidator if your company is forced into liquidation. If any form of misconduct is found there are serious ramifications - you can be disqualified as a director for up to 15 years, and could be held personally liable for the company’s debts.
A common concern for directors is how they’re going to afford liquidation, as each process requires the involvement of a licensed IP. The professional fees involved are typically covered by the sale of assets, however, when a company is solvent.
In the case of voluntary insolvent liquidation your CVL fees could be paid by director redundancy if you or any other directors are eligible to claim, and to do this you’ll need to have worked under a contract of employment for a minimum of two years.
Liquidation may not be your only option in these circumstances, and it’s highly advisable to seek professional advice as soon as your company starts to struggle financially. Depending on the situation a Company Voluntary Arrangement (CVA) or company administration may be more appropriate.
Alternatively, a source of alternative finance might provide the financial boost your company needs to recover stability. If you’re considering liquidating your company or would like more information on director redundancy, our partner-led team at Real Business Rescue can help.
We’re insolvency specialists, helping businesses to return to profitability wherever possible. Please contact one of our experts – we offer free same-day consultations and operate a broad network of offices throughout the UK.
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