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Liquidation Explained In England and Wales

Liquidation explaines

Liquidation explained in England and Wales. They were written by John A Waller. Reviewed November  10th,2022.

Liquidation – The process of bringing a business to an end while enabling the distribution of its assets to its creditors once realised. Liquidation occurs when a company becomes insolvent, meaning it cannot pay its obligations when they become due.

If your company remains at risk of liquidation, you may have questions about the process and how it will affect you as a director.

We excel in advising and helping small business owners in all aspects of company liquidation. 

Suppose no option exists except liquidating your business. In that case, we have fully qualified and accredited liquidators who can deal with the liquidation process. The team at HBG Advisory remain approachable, answering directors clearly. Our team possess over 20 years of experience helping businesses

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Speak with an insolvency expert via live chat during working hours, or call us on 0800 612 5448 to understand further the liquidation of an insolvent limited company.

Liquidation Explained In England and Wales – What does liquidation mean?

The word ‘liquidation’ refers to closing a limited company to distribute the proceeds to creditors.

UK law stipulates liquidation remains a formal procedure in which an appointed licensed insolvency practitioner closes a limited company down (Liquidator).

Liquidation means all the company’s assets remain sold (liquidated). Any revenue realisation remains redistributed to priority among creditors and shareholders.

The liquidator then strikes the company of the registrar at Companies House (dissolution), the final phase of the liquidation process.

So, the liquidation process can be used therefore to close both solvent and insolvent companies. A solvent company can pay its debts, where assets remain more significant than liabilities. An insolvent company cannot pay its debts.

UK laws relating to company liquidation however remains set out in the Insolvency Act 1986.

What happens when a company liquidates?

When a company liquidates, it:-

  • ceases trading;
  • employees made redundant, and 
  • The company no longer considered a legal entity.

As a director, your powers thereforel end, as will access to company bank accounts.

For solvent companies, liquidation remains tax-efficient for businesses with assets to dispose of and no debts.

Let’s say you’re insolvent (with debt). In that case, a licensed insolvency practitioner will organise the liquidation of corporate assets and the proceeds distributed to the company’s creditors. 

The liquidator’s final duty remains to strike the company of the register at Companies House. 

Understanding the different types of liquidation of a company

Liquidation of a company can be carried out in three different ways. All require the appointment of a liquidator.

Shareholders and company directors initiate voluntary liquidation procedures, such as CVL and MVL.

Creditors such as HMRC usually initiate the compulsory procedure however hrough a court order.

Creditors Voluntary Liquidation CVL

A Creditors’ Voluntary Liquidation (CVL)- relates to the closure of Insolvent Companies. Company shareholders initiate it.

A Creditors’ Voluntary Liquidation applies to a company who cannot pay its debts and therefore dissolved. The assets will then be redistributed to creditors. The procedure allows directors to write off unsecured corporate debt personally guaranteed.

Company directors may see insolvent liquidation as an exit from financial difficulty while legally addressing all creditors.

Members Voluntary Liquidation MVL

  • A Members’ Voluntary Liquidation (MVL) applies to solvent companies looking for a tax-efficient way to draw cash out of the company legally. MVLs allow you to pay less capital gain tax (at 10% on all qualifying assets)

Your company may:-

  • outlasted its objective and, while at a convenient end to trading, or 
  • draw cash and company assets tax-efficiently.

Insolvency practitioners realise business assets at fair value before dissolution.

Compulsory Liquidation (Involuntary Liquidation)

A creditor initiates compulsory liquidation to close a business that cannot pay its debts when  due. This procedure remains however a court order application for unpaid debt. In most cases, HMRC uses winding up petitions the most. Nevertheless, any creditor can initiate if owed £750 or more.

In England and Wales, the Limitation Act 1980 allows a creditor to take up to six years to start legal actions to recover a business debt.

A winding-up petition, once approved, prompts a Compulsory Liquidation. Unlike a CVL, this process remains not a voluntary decision by the company but remains tigated by creditors as a last resort.

The Official Receiver (OR), remains usually the one who manages this insolvency procedure. However, the court may appoint independent licensed insolvency or the OR. For directors, this remains not a voluntary process.

The director’s conduct before the liquidator’s appointment remains subject to a confidential report forwarded to the Secretary of State once the liquidation concludes. 

It is important to note that failure to cooperate with the Official Receiver entails severe repercussions for a company director.

An adverse situation can snowball if you cannot pay the creditor and do not act immediately.

Liquidation Explained In England and Wales – Liquidation Process

  1. A licensed insolvency practitioner appointed as the  liquidator.
  2. Directors’ powers cease, and the IP takes over the company’s management.
  3. The assets of the company.assessed and realised.
  4. Creditors paid in priority.
  5. Shareholders receive leftover money.
  6. The company remains dissolved and struck off by the registrar of companies.

Timeframe

There remains no fixed time frame for liquidating a company. With several factors dependent on each case, timeframes will vary widely.

But once the liquidators engaged, they will act immediately. The business can be liquidated within two to three weeks if sufficient information provided.

The complete liquidation process can take around one year but longer when a larger company involved.

The period between the initial winding-up petition and the end-of-court proceedings, typically three months for compulsory liquidation.

Liquidation Explained In England and Wales – Priority of Claims

Who gets paid first in liquidation? 

Paying out creditors –  determined by a ‘priority of claims’.’

  • secured creditor; 
  • Expenses incurred by the insolvent estate;
  • liquidator fees;
  • Preferential creditors;
  • Unsecured creditors;
  • Shareholders.

Liquidation Explained In England and Wales – Do Employees Get Paid?

What does liquidation mean for an employee of the company? 

So do employees get paid in a liquidation?

Yes, to a limit.

The redundancy payment office pays any unpaid wages and includes

  • Employee wages unpaid;, 
  • arrears of wages;
  • outstanding accrued holiday pay and 
  • Notice pay.

Consequences for directors?

When liquidating a company, directors’ duties and responsibilities undergo a marked shift if the business becomes insolvent.

Once insolvent, the company directors must prove they have acted in the best interests of creditors. Therefore, avoid unwanted personal liability. So directors must act responsibly and immediately take professional advice. When they become aware of their company’s insolvency.

Directors should be aware that once an Insolvency Practitioner is appointed, the liquidator will investigate company directors’ actions during the period preceding the liquidation.

The liquidator mainly seeks clarification that as soon as the director becomes aware of the situation, he puts the interests of creditors first. However, if this is not the case, the director will be exposed to potential wrongful or fraudulent trade charges.

The director may become personally liable for some or all of the company’s debts if this can be proven.

The Role of a Liquidator

An appointed licensed liquidator (IP) – needed for liquidation. Once appointed, they have several duties to perform.

These experienced professionals remain responsible for acting as an impartial third party to oversee the process from beginning to end after their appointment.

The liquidator’s role contains many responsibilities, including 

  • Preparing a Statement of Affairs document for the creditors, with the assistance of directors. Similar to a balance sheet. It shows the exact financial position of the company 
  • Paying out cash from the realised assets and surplus funds to creditors and debts owed. If there remains a surplus, the shareholders therefore receive the balance. 
  • Agee outstanding claims against the company and fulfil those claims in order of priority set by law.

Costs & Fees of Liquidation

How much does liquidation cost?

Typically between £3,000 to £6,000 + VAT for an SME. However, this can vary depending on several variables, such as the company’s size and volume of creditors.

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