What is Liquidation?
When a company is unable to pay its debts, it may go into liquidation. This is a process where the company’s assets are sold off in order to pay its creditors.
Company liquidation is the process of selling all the business’ assets in order to pay the debt owed to its Creditors. After Liquidation, the company will cease to exist (dissolved).
Liquidation is often the last resort for a financially struggling Company. Liquidation becomes suitable when there is no genuine hope in the business recovering.
A licensed Insolvency Practitioner (IP) assumes the role of a Liquidator who acquires and sells the assets efficiently to pay off as much Company debt as possible.
How is a Company put into Liquidation?
There are three types of Liquidation:
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Creditors’ Voluntary Liquidation
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Compulsory Liquidation
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Members’ Voluntary Liquidation
Voluntary liquidation, also known as Creditors’ Voluntary Liquidation (CVL), is when the business owners and directors decide to close their business because they can no longer pay their creditors. The company has to already be insolvent for this to take place.
For a Voluntary Liquidation to take affect, the directors have to propose it to the shareholders, and convince them that the Company is no longer financially viable.
If 75 per cent of shareholders, by value of shares, agree; a Liquidator is appointed to begin the process.
Companies House must be informed within 15 days.
The decision must be advertised in The Gazette within 14 days.
Compulsory Liquidation is when a business is forced into liquidation by its Creditors. This usually happens after the court approves a “Winding Up” petition.
To initiate a Compulsory Liquidation, the Company must have a debt of at least £750 that they cannot pay off and require shareholder sign off at 75 per cent (as with Voluntary Liquidation).
When a Company chooses to liquidate, despite having no debt or debt that it can afford to pay off.
The Company directors need to make a declaration of solvency i.e a statement to prove that they are not insolvent and can pay their debt. Once again, 75 per cent of shareholders need to consent before liquidation proceedings can be initiated.
Owning stock gives the shareholder an ownership stake in the corporation itself. Shareholders can vote to dissolve or sell the corporation and liquidate, or sell off the assets. They can then claim a share of the proceeds from the sale.
The declaration of solvency requires the following pieces of information:
- A statement that says the Company can pay off its debt, including the interest at the official rate.
- Company name and address.
- Company Director name and address.
- A statement that says how long it will take to pay off debt. To qualify for Members’ Voluntary Liquidation, the debt must be paid off within 12 months of liquidation.
The Company must:
- Arrange a meeting with their shareholders within five weeks to make the Liquidation final.
- Arrange for a licensed Insolvency Practitioner (IP) to carry out the Liquidation.
- Advertise the intent to liquidate in The Gazette within 14 days.
There are a plethora of reasons why. It could be that the Company Directors have no desire to run the company anymore, are retiring or want to sell but cannot find a buyer.
The Creditors of a Company can ask a Court to wind up a company that cannot pay its debt. This is a Winding Up Petition. If the Court accepts the petition, the Company enters the process of Liquidation.
Are there any conditions to Winding Up?
Yes, a Creditor cannot get a Winding Up on any Company that owes it money. Certain conditions have to be met:
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The Creditor must prove that their debt cannot be cleared by the Company.
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The Creditor must be owed at least £750.
These stipulations stop Creditors from abusing the Winding Up process.
By serving a statutory demand, which is a written warning to the Company from the Creditors that if a debt is not paid within a certain amount of time, legal action will commence.
A Company not meeting a statutory demand is proof they cannot pay debts.
Yes, if a Company thinks the conditions have not been met, they can contest it and present their arguments. For example, if they think the debt is not legitimate or if the statutory demand was not adequate.
Alternatively, the Company can contact the Creditor, upon receiving the Statutory Demand, to attempt to settle a debt outside the court.
A Voluntary Liquidation is better because the Director makes the choice of going into Liquidation or not. However, if financial difficulty becomes too severe, they will be forced into Liquidation via a Compulsory Liquidation.
There is no legal time limit for a business to liquidate its assets. It usually takes between six and twenty-four months to fully liquidate a company.
If the company is insolvent yet its board continues to trade, the directors of the company may become personally liable to help meet the deficit to unsecured creditors, especially if the continued trade made the company’s financial position worse.
When is liquidation of a Company complete?
Company liquidation will conclude when:
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All company assets have been sold.
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Dividends have been paid to the creditors.
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A final meeting with creditors is held.
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The liquidator is released by meeting or by court.
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The final accounts are filed with Companies House.
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The company is dissolved.
The liquidation fee will vary according to the size of the company, and the amount of work involved. Costs can range from around £4,000-£5,000 plus VAT for small limited companies with few assets.
You may allow a deduction for any part of a liquidator’s expenditure wholly and exclusively incurred in disposing of a company’s assets. A liquidator is normally a professional person, for example an accountant, and in their capacity as liquidator they may pay themselves fees for professional services.
This can mean that employees lose their jobs, and in some cases, the employer may not able to pay them the wages and entitlements they are owed. When a business is bankrupt, also known as going into liquidation or insolvency, employees can get help through the Fair Entitlements Guarantee (FEG).
You can be a Director of as many companies as you like at the same time. However, if you have been the director of a liquidated company and you set up a new company it cannot have the same or a similar name to the old company as it can lead to possible confusion amongst creditors and other stakeholders of the old company.
The right of certain stakeholders in a firm to receive the proceeds of the firm’s liquidation. Liquidation rights vary according to a hierarchy; that is, interested parties higher in the hierarchy have the right to receive all their proceeds before those lower in the hierarchy.
Once a winding up order is granted, the liquidator will begin liquidation proceedings and there is no more you can do to save your company. During liquidation, all business assets are sold to repay creditors, and the company closes down.
Liquidation value is the total worth of a company’s physical assets when it goes out of business or if it were to go out of business. Liquidation value is determined by assets such as real estate, fixtures, equipment and inventory. Intangible assets are not included in a company’s liquidation value.
In the same way as a regular auction.
They can be auctioned, put on eBay or sold privately. There is no hard and fast rule except ensuring that a fair price is received for items sold and that they are not deliberately undersold in an attempt to pay less debt.