What happens when a company goes into liquidation?

The impact of the COVID-19 crisis continues to be felt by employees and businesses alike.

There have been changes in the law surrounding insolvency due to the current economic climate. However, this has not stopped companies entering liquidation altogether. 

Read on for all you need to know about liquidation and what to do if you are facing business money worries. 

What is liquidation?

Financial and economic liquidation is the process by which a business permanently ceases trading. Liquidation usually happens because of insolvency, meaning that a business has been unable to meet their financial obligations when required. 

When a company goes into liquidation they are not permitted to continue operating nor employing people. Moreover, any remaining assets are used to repay creditors and shareholders. Consequently, the business will also be removed from Companies House, meaning that the company can no longer trade as a legal entity. 

Outstanding Debts 

When a company is liquidated, any assets that are on the books of that company are used to pay off outstanding debts.

If you are the director, then you will be unable to continue dealing with any financial assets relating to the business. As a result, all your directorial powers will cease. 

You will also need a validation order to access your company bank account. 

What is a liquidator?

A liquidator is an authorised insolvency practitioner or ‘official receiver’ who runs the liquidation process.

As soon as a liquidator is appointed, they will take control of the business.

Their roles and duties include:

• settling any legal disputes or outstanding contracts
• selling off the company’s assets and using any money to pay creditors
• meeting deadlines for paperwork and keeping authorities informed
• paying liquidation costs and the final VAT bill
• keeping creditors informed and involving them in decisions where necessary
• making payments to creditors
• interviewing the directors and reporting on what went wrong in the business
• ensuring the company is removed from the Companies House

‘Assets’: What are they really?

The kinds of assets sold on after a company go into liquidation depend on the type of business in question. However, assets do not only refer to stock but can involve:

• Store fixtures and fittings including carpeting and rugs
• Décor, art, and furniture
• Tools
• Machinery
• Vehicles
• Office equipment

What is the process of liquidation?

1. Closure of business

The liquidation takes place when an appointed Insolvency Practitioner (liquidator) closes a company.

2. Selling of assets

The assets of the company will then be sold (liquidated).

3. Paying of monies owed

Any monies collected through the sale of goods is then divided between the relevant creditors. This is done in a pre-arranged order based on amounts owing and the priority of their claim.

Ordinarily, the company’s secure creditors are prioritised first. Then government taxes are paid before employee wages, unsecured creditors, shareholders and so forth.

4. Dissolution

After the financial elements are settled, then the final stage of the liquidation process will be removing the business from Companies House; known as dissolution.

What are the kinds of liquidation?

There are three main types of liquidation. These are as follows:

Members’ Voluntary Liquidation (MVL)

 This type of liquidation means that your company can pay their debts, but you are choosing to close it.  

Creditors Voluntary Liquidation (CVL)

This form of liquidation occurs when the directors of a company confirm that they cannot meet their financial obligations and request that the business be liquidated. 

Compulsory liquidation

If a company cannot pay its debts, a court of law will rule on whether the business will be legally liquidated.

CVL: How to arrange liquidation with your creditors?

A company director can recommend that the business stop trading or be ‘wound-up’ if:

• the company is insolvent (or cannot pay their debts)
• enough shareholders support the decision

How does a shareholders’ agreement work?

To arrange a shareholder’s agreement, you will need to ask them to vote. 

A minimum of 75% of shareholders must agree to liquidate the company to constitute a ‘winding-up resolution’.

Once the resolution is agreed, there are three further steps to follow. 

They are as follows:

1. Appoint an authorised insolvency practitioner or liquidator

2. Inform Companies House within 15 days of the agreement

3. Advertise the resolution in The Gazette within 14 days

Compulsory Liquidation: Applying to the court for liquidation

A court can be asked to order a company to stop trading and be liquidated. To do this, you will need to show the courts that:

• the business cannot pay its debts of £750 or more
• 75% of shareholders agree that the court can liquidate the company

For the above rules to apply, your company can be based anywhere but must carry out most of its affairs in England, Scotland, and Wales.

To apply to the court, you will need to adhere to the following steps:

1. Complete a ‘winding-up petition’ (form Comp1) 
2. Return it to the courts with:
   1. Details of your petition and form Comp 2 
   2. A copy of the winding-up resolution agreed by the shareholders

How much does Compulsory Liquidation Cost?

Compulsory liquidation costs:

• £1,600 to submit the petition
• £280 for the court hearing

What happens after you apply?

If the court accepts your petition for liquidation, you will receive a date for the hearing by return.

Before the date of the hearing, you are required to:

• Serve a copy of the petition to your company
• Complete a certificate of service confirming to the courts that the petition has been served
• Advertise in The Gazette a minimum of 7 days before the hearing
• Send both a copy of the advert and the certificate of service to the relevant court

What happens in the court hearing?

You will need to attend the hearing. If you are unable to attend, then you will be required to have representation in the form of a solicitor or legal equivalent. You will not need to give evidence on the day.

Should the court agree to a winding-up order or liquidation, then they will appoint an official receiver to oversee proceedings.

Following the hearing, a copy of the winding-up order will be sent to the company’s registered office.

MVL: Liquidate a company you do not want to run anymore

Even if your company remains solvent, you may have reasons for wanting to liquidate it. 

These can include:

• Wanting to retire
• Not having a successor to a family business
• You simply do not want to run the business any more

To apply for voluntary liquidation, you will need to:

• Make a ‘Declaration of solvency’ (applicable for English and Welsh companies)
• Ask the Accountant in Bankruptcy for a form 4.25 (applicable to only Scottish companies)

You will be required to review all company assets and liabilities before making the declaration.

How to make a declaration of solvency?

In England and Wales, you will need to write a statement confirming that the company is solvent. This means that the business directors have evaluated all finances and concur that the company can pay its debts, inclusive of any interest where applicable.

You will also need to include:

• the name and address of the company
• the names and addresses of the company’s directors
• confirmation on how long it will take the company to pay any debts. This must be no longer than 12 months from when the company is liquidated
• a statement of the company’s assets and liabilities

After you have signed the declaration of solvency, there are five further steps to follow. 

These are:

1. The majority of directors will also need to sign the declaration in front of a solicitor or legal equivalent
2. You will be required to call a general meeting with all shareholders. This needs to be done within a 5-week timescale
3. At the meeting, you will need to appoint an authorised insolvency practitioner or liquidator
4. You will have to advertise the resolution in The Gazette within 14 days
5. Finally, you will need to send your signed declaration to Companies House within 15 days of passing the resolution

Key Takeaway

Whatever your reasons for needing or wanting to liquidate a company, it can be a complicated and challenging process. Especially if you are unfamiliar with court procedures.

If you have been hit by hard financial times or you simply want to retire your business, then we recommend that you seek advice to ensure that you cover all bases legally and adequately.

Contact one of our expert commercial law solicitors today who will be able to talk you through your liquidation options.