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What is Liquidation: How to liquidate your limited company
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What is company liquidation?
Liquidation is a formal insolvency procedure used to close a limited company. There are several types of liquidation. The one most suitable for your company will depend on whether the business is solvent or insolvent at the time of liquidation, and whether the company is being liquidated voluntarily by its directors, or is being forced into liquidation by order of the court.
Liquidation is the formal process of closing a limited company. Liquidation can be used to bring about the end of a company due to insolvency, or simply as a means to extract the proceeds from a profitable and solvent company.
There are three main types of liquidation in business: Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation, and Compulsory Liquidation. The most appropriate liquidation process for a company will depend on a number of factors, but mainly it will come down to the financial position of the business at the time of liquidation.
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A limited company can only be liquidated by a licensed insolvency practitioner who will take on the role of the company's liquidator. The insolvency practitioner may be appointed by the company’s directors/shareholders, or an Official Receiver could be appointed in the event of a court-ordered compulsory liquidation. Once appointed, the insolvency practitioner will assume control of the company and take care of the entire liquidation process from start to finish, including handling all communications with outstanding creditors on your behalf.
Liquidation is a formal process to close a limited company. Once a company is knowingly insolvent, meaning it is no longer able to service its outgoings and debt liabilities as and when they fall due, the company may need to be placed into liquidation.
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A licensed insolvency practitioner will be appointed to handle the process. It will be their role to identify all company assets before selling (or liquidating) these for the benefit of creditors. Any outstanding debts which remain after this process will be written off, unless they have been secured by a director’s personal guarantee. The company will then be wound up with Companies House, its name removed from the register of limited companies; it will then cease to exist as a legal entity.
Liquidation is a formal process which brings about the end of a limited company. As part of the process all company assets will be sold – or ‘liquidated’ – for the benefit of outstanding creditors and/or shareholders before the company is struck off – or dissolved – from the register held at Companies House. Once this has happened the company will cease to exist as a legal entity. Any outstanding debts owed by the company will be written off unless the director has personally guaranteed these borrowings.
There are three main types of liquidation, and while all seek to achieve the same end result – that is the formal closure of the company – each process is distinct. The procedure used to place your company into liquidation depends mainly on its financial position at the time.
A company can be liquidated regardless of whether it is solvent or insolvent. For solvent companies this is done by way of a Members’ Voluntary Liquidation (MVL), while insolvent companies are liquidated through either a Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation (WUC).
Creditors’ Voluntary Liquidation (CVL)
A Creditors' Voluntary Liquidation (CVL) is initiated by the company’s directors when it has become clear that the company in question is insolvent and the chances of affecting a successful turnaround or restructuring are slim.
While this is a voluntary process, a CVL is typically only entered into when there are few other alternatives open to the company. CVL is often triggered by a downturn in company cash flow and unmanageable business debts. Directors should take early advice if they're experiencing issues such as the loss of a key customer or contract, tax arrears with HMRC, or being unable to repay your bounce back loan; all typical warning signs of a company in financial distress.
Directors are able to appoint an insolvency practitioner of their choice and have some control over when the liquidation process commences. Directors will also be responsible for paying the insolvency practitioner’s fees for dealing with the liquidation. In many instances these fees will be taken from the company’s assets, however, if there are insufficient assets available then the directors will have to personally make up the shortfall.
As the director of a limited company, you have a number of legal obligations you must adhere to once you are aware your company is insolvent. One of these is placing the interests of your creditors above those of the company and its shareholders. In essence this means you should not do anything to worsen the position of creditors, such as accruing additional debt or diminishing company assets. Seeking the advice of a licensed insolvency practitioner at this point to discuss the possibility of a Creditors’ Voluntary Liquidation reflects favourably on your conduct as director.
Compulsory Liquidation (WUC)
In some cases a company will be liquidated by order of the court rather than voluntarily by its directors. This typically happens following the issuing of a Winding Up Petition (WUP) by one or more of the company’s creditors. Following a WUP being advertised, the company’s bank accounts will be frozen to prevent assets from being removed. The WUP will be heard by a judge, and if there is no adequate defence, a Winding Up Order will be granted which will lead to the company being forcibly wound up.
With compulsory liquidation an Official Receiver will be appointed to handle the winding up of the company and to deal with its creditors. The Official Receiver will be allocated by the courts, and their role will be to identify any company assets, realise these for the benefit of outstanding creditors, before formally winding up the company. An investigation into the conduct of the directors will then be undertaken to ascertain the reasons behind the company’s ultimate failure.
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Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation – or MVL – is a liquidation procedure designed as a way for solvent companies to formal close their business when a company has reached the end of its useful life. This often happens when its director(s) have no further use for the company – either due to retirement or simply because they are moving on to a new venture – and want to access the profits tied up in the business.
The main benefit of an MVL is that it allows for funds to be extracted in a tax-efficient manner. This is because funds taken from a company via an MVL are treated as capital gains rather than income, therefore they are subject to Capital Gains Tax rather than Income Tax. As an added incentive, Business Asset Disposal Relief can also be applied which, if you qualify, will reduce CGT down to just 10% up to a lifetime limit of £1m worth of gains.
MVLs do come with a cost attached so they are typically only suitable for those companies with in excess of £25,000 to distribute.
Unfortunately, there is no single answer to this question. The procedure will be handled differently for a compulsory liquidation that it would be dealt with in a voluntary liquidation; likewise a solvent liquidation is different to an insolvent liquidation. Your appointed insolvency practitioner will be able to explain the intricacies of each before you go ahead.
Here is a basic timeline of what transpires in the voluntary winding-up of an insolvent company via a CVL:
- Directors meet to pass a resolution to convene a general meeting liquidation of the company per the Companies Act 2006. To consider passing a special resolution to wind up the company and also convening a meeting of the company's creditors.
- Once the resolution is agreed, the advert is placed in the Gazette within a 14 day time frame.
- Creditors MUST be notified at least 7 days prior to the meeting
- Statement of affairs prepared by directors to be presented at meeting
- General meeting of members held and resolution to wind up is passed
- One director is chosen to represent the group at the creditors meeting and officiate
- Once the liquidator has been appointed, it is up to the directors to cooperate in every way. This means that any information asked for should be given openly and honestly so as not to hinder the winding up/liquidation of assets.
- The liquidator will work towards identifying assets of the company, liquidating these to release as much money as possible, before distributing these proceeds to creditors as per the hierarchy set out in the Insolvency Act 1986.
What are the advantages of Company Liquidation?
- Adhere to your duties as company director
Voluntarily liquidating your company could help to mitigate the possibility of wrongful trading accusations. Directors have to adhere to certain legal duties and responsibilities; one of these is to act in the best interests of the company’s creditors as a whole once he or she is aware that the company is insolvent or is soon likely to become insolvent. Failure to do this would be deemed wrongful trading. By voluntarily contacting an insolvency practitioner at the early stages of insolvency, you are demonstrating your desire to prioritise your creditors interests.
- Protection from Personal Liabilities
If a director is found guilty of wrongful trading in a post-liquidation investigation they could be held personally liable for some or all of the company’s debts. When you choose to liquidate a company voluntarily you’ll be given professional guidance before, during, and after the procedure, reducing your chances of making any ill-informed decisions while the company is knowingly insolvent.
- Avoidance of Court Procedures
Voluntarily winding up your company through a CVL, rather than waiting for your creditors to force you into compulsory liquidation, will save you from having to be petitioned through the Courts. During a compulsory liquidation the petition to wind up your company is made public through an advertisement in the London Gazette meaning anyone will be able to see that your company is being forcibly liquidated. Although a petition advertisement still has to be listed in the Gazette if you opt for a CVL, it will be apparent that it was a voluntary decision, and not a hostile action taken by creditors or HMRC.
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Disadvantages of company liquidation
- Additional Expenses
Liquidating your company voluntarily may be more expensive for the directors when compared to waiting for a creditor or HMRC to force the company into compulsory liquidation. In a compulsory liquidation the cost of issuing a winding up petition is covered by the creditor doing the petitioning; however, in a voluntary liquidation, the cost of appointing an insolvency practitioner is paid for by the directors of the company being liquidated. However, if the insolvent company's assets are sufficient to meet the liquidation costs then the directors will not have to make a personal contribution.
- Loss of Brand and Reputation
After the company is liquidated all brand recognition will be lost. This may also affect the reputation of the company that has built up over the years. For this reason liquidation should be considered as a last resort, only after alternative options that would allow the company to continue trading have been examined and subsequently ruled out.
- Facing a Post-Liquidation Investigation
After every liquidation process the liquidator is required to investigate all actions taken by the directors in the time leading up to it becoming insolvent. This will be the case whether the liquidation is entered into voluntarily or is forced upon the company through a compulsory court-ordered liquidation.
- The Possibility of Being Held Personally Liable
While the protection offered through limited liability means that directors will not usually be held personally responsible for the debts of their company, there are certain instances where this does not hold true. If wrongful or fraudulent trading is discovered and later proved, then directors will typically be expected to contribute to the shortfall of the outstanding debts. Directors will also be held liable for company debts if they have signed a personal guarantee for any company borrowing.
While placing a company into liquidation is the formal process of bringing the business to an end, this is not the only way this can be achieved. In some situations, a full liquidation procedure will not be required. Instead, the company may be able to be dissolved; this is also known as company strike off.
Company strike off – or dissolution – is an informal process which allows a company to be removed from the register held at Companies House. This is achieved by its directors submitting a DS01 form and paying the relevant fee. A notice will be placed in the Gazette advertising of the strike off application and so long as no objections are received, the company will be struck off the register. Once it is taken off the register, it ceases to exist as a legal entity. It is often a quicker, easier, and cheaper alternative to liquidation; however, you should be aware that it is not suitable for all companies and all situations.
Dissolution is aimed at those companies which have reached the end of their useful life and are no longer required by the directors/shareholders; ideally, they should hold no assets or liabilities at the point of strike off.
If strike off is attempted by an insolvent company – that is, one which has outstanding debts – it should be expected that an objection will be lodged by a creditor; if this is done, the process will be halted and the company will remain active. It is in a creditor’s interests to stop your company being struck off should debts exist, as once a company is dissolved the money owed is not easily recoverable without a lengthy and complex process to reinstate the company to the register.
On the reverse side, if your company has assets including cash at bank, these become ‘bono vacantia’ upon strike off, with ownership passing to the Crown. Therefore, if your company has debts or assets, liquidation is the most appropriate way of closing the business and tying up its outstanding affairs.
Whether you have made the decision to walk away from a profitable business and would like to extract the profits tied up in the company, or whether escalating debts and falling income means the business can no longer service its outgoings, expert advice is vital in helping you make the right decision for you and your company.
Company liquidation may well be the answer, however, you must remember that the liquidation of a company, whether solvent or insolvent, is a major step to take and you must take professional advice to ensure this is appropriate for you and your business. A licensed insolvency practitioner will be able to discuss your options, explain the pros and cons of each, discuss your potential eligibility for redundancy, and make an expert recommendation about how you should proceed.
In the event of your company being insolvent, this may mean that you have to cease trading immediately in order to protect company assets and shield creditors from further losses; in some instances, however, continuing to trade may be advised if this will ultimately increase the funds available to creditors. It is only by taking the advice of a licensed insolvency practitioner that you can be sure whether continuing to trade is the right thing to do; get this wrong and you could find yourself personally liable for any resultant losses suffered by creditors.
As a formal insolvency procedure, liquidation can only be entered into following the appointment of a licensed insolvency practitioner. They will take on the role of liquidator and will be responsible for a number of things during the process including liaising with creditors, identifying and recovering company assets, and distributing the proceeds of these according to a designated hierarchy. In a solvent liquidation proceeds will be distributed to shareholders, while in the case of an insolvent liquidation, any recoverable funds will be split amongst the company’s outstanding creditors.
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If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner should be your next step. Real Business Rescue have a nationwide network of over 100 licensed insolvency practitioners ready to provide the help and guidance you need when it comes to your options to closing your business and your potential entitlement to director redundancy. With a network of offices located up and down the country you are never far away from expert advice.
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