What Happens When a Company Goes Into Liquidation?
When a company goes into liquidation, it will cease to trade, all employees will be made redundant and its assets will be sold. The funds realised are used to pay the costs of the liquidation with any surplus being distributed to the company’s creditors, in order of priority.
An investigation and subsequent report is also submitted on the conduct of the Directors of the Company to the Department for Business, Energy & Industrial Strategy under the CDDA Act 1986. This is standard procedure for a Creditors’ Voluntary Liquidation.
There are three types of liquidation and the exact steps taken depend upon which procedure is being used.
Compulsory liquidation is forced upon a company when one or more creditors, owed £750 or more, petition to the Court for a winding up order to be granted against the company.
Although not a requirement, a creditor will often first issue a statutory demand to the company, giving the directors 21 days to pay in full, or negotiate a settlement.
A qualifying creditor issues a winding up petition in Court and must also serve a copy of the petition on the Company at its registered office.
The company should seek urgent advice from an insolvency practitioner if this is received. They will assess the options available to the company allowing it to potentially avoid the compulsory liquidation route.
If the company intends to defend the petition (on the basis that the debt isn’t actually owed, or on a technicality such as inadequate service) it may need to seek an injunction to restrain advertisement.
If the company is unable to put a hold to proceedings, then after a period (usually 7 days) the winding up petition is advertised in The Gazette.
This will alert other creditors, who may join the petition, making a claim for their own debt by serving a notice of support for the original petitioner.
Upon notification, the bank is also likely to freeze the company’s account, which will effectively put a stop to all trading. This is because any transactions entered into by the company, after the presentation of the petition, may be considered void (and therefore repayable to the liquidator) unless the Court validates the transactions.
If the company is unable to raise funds to repay the debts of all petitioning creditors and no viable alternative routes exist, then the Court is likely to approve the petition and make a Winding Up Order.
Once the Order is made, the company will almost certainly be required to cease trading and all employees are automatically made redundant. The directors powers will also cease.
Initially the Official Receiver will be appointed as liquidator, however the company’s creditors may vote to appoint an insolvency practitioner as liquidator in place of the Official Receiver ,if there are significant assets to recover.
The Official Receiver will conduct an investigation into the background and circumstances leading to insolvency, with directors required to complete a detailed questionnaire and attend a lengthy interview.
If there is evidence of wrongdoing, it will be reported to the Department for Business, Energy & Industrial Strategy and could result in a fine, director disqualification and/or a compensation order.
The liquidator’s role is then to collect in and realise the company’s assets. The funds raised will be paid out according to the statutory hierarchy, which sets out the order in which the costs of the liquidation and creditors are paid.
Shareholders will only receive a payment from a liquidation, if all of the costs of the liquidation and creditors have been paid in full, plus statutory interest.
Creditors’ Voluntary Liquidation (CVL)
A voluntary liquidation, known formally as a Creditors’ Voluntary Liquidation, occurs when the directors/owners of a company, make a decision to close down the business. This is appropriate where the company is insolvent and does not appear to have a viable future.
The directors of the company discuss options with an Insolvency Practitioner.
If Liquidation is identified as the best option, an Insolvency Practitioner must be appointed to act as liquidator, this is explained further in our article Can I Liquidate My Company Myself?
The company provides to the proposed liquidator, details of its financial affairs including its assets and liabilities, so that the impact of liquidation can be properly assessed. Notices are sent to the shareholders, creditors and the Gazette to call meetings and propose a decision procedure regarding the proposed CVL.
A ‘Statement of Affairs’ is produced summarising the assets and liabilities of the company in order to report to creditors. A directors’ report is also produced providing a narrative of the company’s history and amongst other information, the reasons behind the financial difficulties leading to liquidation being required.
Meetings of shareholders are held and a creditors’ decision process commenced to pass resolutions to take the company into liquidation and to appoint a liquidator.
If a virtual meeting is called rather than deemed consent, then there will be a meeting held albeit by telephone, unless a physical meeting is specifically requested by creditors, together meeting the following criteria:
- 10% of creditors by value
- 10% in total number of creditors
- 10 individual creditors
The liquidator takes control of the company as soon as the liquidation is approved. The directors powers cease but their duties continue. Any assets are realised into the liquidation, for the benefit of creditors.
The affairs and circumstances of the company leading up to the liquidation are investigated and reported on to the Department for Business, Energy & Industrial Strategy under the CDDA Act 1986 (this is a legal requirement).
Members’ Voluntary Liquidation (MVL)
Where directors want to end the life of a solvent company (e.g. due to retirement) and there are funds or assets in excess of £25,000, an MVL offers a tax efficient way of extracting the remaining funds from the company.
This is because distributions made out of an MVL are treated as capital receipts, rather than income and are therefore subject to capital gains tax, rather than income tax. This is likely to be beneficial if Entrepreneurs’ Relief is available.
Although the company is solvent, the services of a licensed insolvency practitioner will still be required to bring its operations to an end via an MVL. There are 6 key steps involved in taking a company into a Members’ Voluntary Liquidation:
The company discusses matters with an Insolvency Practitioner.
The company holds a Board meeting to confirm its decision to proceed with a solvent liquidation.
The directors swear a Declaration of Solvency. This declaration needs to be sworn in front of a solicitor and is filed at Companies House. The declaration briefly outlines the company’s assets and liabilities and confirms that the company can pay all of its liabilities (with interest) within 12 months. It is extremely important that the company is solvent when the directors swear the Declaration, as if it transpires that the company is insolvent, then this may constitute a criminal offence.
A General Meeting of the shareholders is convened in order to pass the resolutions to wind the company up and appoint a liquidator. This can also be done by written resolutions.
Final accounts and tax returns are prepared and all remaining liabilities paid, including VAT and Corporation Tax, so clearance can be obtained from HMRC.
Once the liquidator has been appointed, he or she will deal with the statutory filing of documents and publication of required notices. In addition, they will dispose of any company assets either by sale to a third party or a distribution “in specie” directly to the shareholders. These distributions are treated as capital not dividends. Similarly, they will realise all other assets and after paying any remaining liabilities and costs of the MVL, these funds will be distributed to the shareholders.