What is Liquidation?August 16, 2017
Liquidation is when a company’s operations are wound up by an insolvency practitioner. During the liquidation process, a company's assets are sold and its funds distributed to its creditors and, sometimes, its shareholders.
Usually, but not always, liquidations take place when a company is insolvent and cannot pay its debts when they fall due. However, liquidations can also be used to close healthy businesses.
If your company is facing liquidation, you probably have a lot of questions about the process and outcomes.
In this blog, I’ll try to answer as many common questions as possible.
However, if you require in-depth advice or guidance, please contact our office directly and I’ll discuss your specific circumstances with you.
What types of liquidation are there?
While the media talks of liquidation as one straightforward process, there are, in fact, three different routes a liquidation can take:
- Members’ voluntary liquidation (solvent)
- Creditors’ voluntary liquidation (insolvent)
- Court liquidation (insolvent)
While the objectives of all three types of liquidation are largely the same — to bring the company’s operations to an end and distribute its assets — there are some important differences.
In this section, I’ll look at each type of liquidation and explain how they work in more detail.
Members’ Voluntary Liquidation
A members’ voluntary liquidation (MVL) is only available to solvent companies. In an MVL, the company’s shareholders appoint a liquidator (who must be an insolvency practitioner) to manage the liquidation process.
The liquidator will:
- Liquidate all assets
- Pay all remaining creditors
- Prepare and submit all final tax returns
- Obtain clearance from HMRC
- Distribute the surplus funds to the shareholders and owners
- Dissolve the company
MVLs are often used when the owners of a business are looking to retire or when the company's particular line of work has come to an end.
All surplus funds extracted from your company via an MVL are treated as capital distribution for tax purposes.
Creditors’ Voluntary Liquidation
A creditors’ voluntary liquidation (CVL) occurs when a company’s shareholders and creditors — usually at the request of the directors — decide to wind up the company because it is insolvent. Importantly, it is the creditors who decide to wind up the company and it is the creditors who choose the liquidator.
During a CVL, the liquidator is tasked with realising all the company’s assets and distributing them to creditors in accordance with the law.
A court liquidation occurs when a company is wound up by an order of the court following a petition to the court requesting liquidation. The petition to the court can be lodged by the company's creditors or its directors and shareholders.
The petitioner will also nominate a particular insolvency practitioner to be appointed as the interim liquidator and the court will normally appoint that person.
In a court liquidation, it is the court that decides to wind up the company and the court that chooses the interim liquidator. A short period of time after the court order, there will be a creditors’ meeting where the creditors choose who the liquidator will be from then on.
Like a CVL, the liquidator is tasked with realising all the company’s assets and distributing them to creditors in accordance with the law
What are the main reasons for liquidation?
The liquidation of a company can have any number of causes, which makes it very difficult to discuss in one short article.
However, there are two main reasons why a company may be liquidated: insolvency and business exit.
In this section, I’ll briefly outline both and discuss why they result in liquidation.
A business is insolvent when it cannot pay its debts when they fall due or where its level of debt exceeds the value of its assets. While the specific causes of insolvency are numerous, the main drivers are the loss of revenue and increased overheads and purchase costs.
In my experience, directors are often aware that they are headed for insolvency but rarely take action. Instead, they choose to bury their head in the sand and hope that things will get better. Unfortunately, things very rarely get better on their own.
Liquidation is also commonly used when owners want to exit a healthy company. This is usually because they wish to retire or because the company’s line of work has come to a natural end.
Solvent closures focus on ending the business and extracting the remaining value in the most tax efficient way.
What are the consequences of an insolvent liquidation?
Liquidation is a complicated legal procedure and it will inevitably affect your working life afterwards. In this section, I will try and answer some common concerns about the consequences of the insolvent liquidation process.
What happens to debts?
The liquidator’s primary duty is to ensure the company’s creditors are properly looked after and this includes being treated equally. Unfortunately, in an insolvent liquidation, the company’s assets won’t cover all outstanding debts, meaning a portion will go unpaid.
If your company is insolvent or facing insolvency, do not try and settle some debts rather than others.
For example, do not pay a small long-term supplier that you feel sorry for and ignore a tax bill from HMRC.
If you do this, you are breaching your legal duties as a director which can have serious consequences for you personally. Additionally, the liquidator may end up taking legal action against the person who received these payments.
During a liquidation, the liquidator will determine which creditors are paid and when. Any debts that remain unpaid by the liquidator are, in effect, written off.
What happens to my brand?
If it is well-known and recognisable, the liquidator may try and sell the company’s brand. However, the brand will usually have no value and will, therefore, be lost when the company is closed.
There are very strict rules surrounding the re-use of business names and brands from an insolvent company. Falling foul of these rules can lead to serious personal consequences for company directors.
Can I still own businesses?
One of the most common questions I’m asked is: “Can I be a director of a company after liquidation?”
The answer is a qualified yes.
Generally speaking, there is no reason why you cannot be the director of a company following liquidation.
However, there are two caveats to that answer.
The first is passing off. Passing off refers to starting a new company with a name that’s similar to your old company. This is illegal and can lead to a criminal conviction against you under the Insolvency Act 1986.
As I mentioned earlier, it is possible to buy the old name from the liquidator. However, if you want to go down this route, I strongly recommend seeking professional advice to avoid any legal repercussions down the line.
The second caveat is about your conduct. During the liquidation process, your insolvency practitioner must investigate the conduct of all directors in the lead-up to liquidation and during the liquidation process.
If your behaviour is found to be negligent or dishonest, you may be disqualified from being a director or being involved in the management of a company for a period of time.
Is Your Business in Trouble?
Ultimately, the success of a rescue will come down to the skill and experience of the insolvency practitioner and the time they have available.
Choose the right person and give them enough time and they will be able to save a business — so long as there’s a viable business there.
The most important piece of advice I can give you is to seek help as soon as you suspect your business is in trouble. As I said before, the more time an insolvency practitioner has to work with you, the more likely they are to achieve a positive outcome so don't put off seeking help until the situation is hopeless.
Contact our office today for free, confidential advice to see how we can help.