What happens when a company is liquidated?

A company going into liquidation has the liquidator sell its assets to pay off its debts, and the company closes. The company’s name remains registered at Companies House. However, note that the registered name is in ‘Liquidation’. 

The name is removed on dissolution, which occurs approximately three months after liquidation.

Two forms of liquidation process exist:

  • Solvent: –
    • When the business can pay its debt as and when due, and
    • assets exceed liabilities on the balance sheet.
  • Insolvent liquidation –
    • When the business is unable to pay debts as and
    • Liabilities exceed assets on the balance sheet.

Insolvent liquidation procedures

If Voluntary:

If Involuntary:

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Solvent liquidation 

A Members Voluntary Liquidation (MVL) procedure requires a licensed insolvency practitioner, which results in the closure of a company after the distribution of its assets once realised among company creditors and shareholders.

As it is a solvent liquidation process, creditors remain repaid. However, Most company directors must sign a declaration of solvency to confirm this is achievable.

The MVL process requires:

  • Shareholders pass the resolution to wind up the company and appoint a licensed IP to perform the process within five weeks of commencement;
  • Also, ensure notice is placed in the Gazette within 14 days of the resolution, ensuring no later than 15 days that the signed Declaration of Solvency is sent to Companies House.

What does a liquidator do?

The Licensed Insolvency Practitioners, once appointed as liquidators, have a primary duty to

  • Realise company assets;
  • Once assets are realised, liquidation costs are paid. Then, distribute the balance of monies to creditors;
  • Deal with outstanding contracts;
  • Keep creditors informed through the issue of reports per a defined timeline;
  • Strike the company of the register at Companies House;
  • Carry out a required investigation into directors’ conduct until the date the liquidator was appointed.

What happens to employees when a company goes into liquidation?

When a company is liquidated, its assets are liquidated, and the company closes. All employees are automatically dismissed, as they are now formally redundant.

If employees have outstanding monies, they are creditors of the company. They may claim via the liquidator for the following:

  • unpaid wages;
  • holiday pay unpaid;
  • Any other outstanding amounts.

Certain payments are treated as preferential creditors; other debts are unsecured and, therefore, placed further down the payment chain for cost.

Once liquidated, those who remain eligible may claim redundancy pay and other statutory rights. However, the company usually does not pay all monies owed, so employees then claim from the National Insurance Fund (NIF).

What happens to contracts when a company goes into liquidation?

The liquidator has the power to adopt or disclaim contracts. They can choose to continue with a contract if they consider it beneficial to the company’s creditors or terminate it if it’s burdensome or unprofitable.

Once appointed, a liquidator’s primary aim is to realise assets. They may exercise considerable powers to acquire company property, bring or defend proceedings, or disclaim onerous property to achieve this.

Most contracts terminate or have the right to terminate in the event of a company’s liquidation, as liquidation is a final event for a limited company.

What happens to directors when a company goes into liquidation?

When a liquidator is appointed, directors no longer:

  • control of the company or anything it owns;
  • act for or on behalf of the company.

If you’re a director, you’re required to provide the liquidator with any requested information regarding the company;

  • Release the company’s assets, records and paperwork to the liquidator;
  • Attend meetings with the liquidator regarding their examination of your former conduct, acting as a company director.

What happens to creditors when a company goes into liquidation?

When dealing with creditors in insolvency, it is vital to recognise the order of priority. Who ranks above whom? Where does HMRC rank? What about the company’s bank? If the bank has security, do employees rank ahead?

Secured creditors

Secured creditors rank high when paid, as they have security over the debt secured with collateral. They have a legal right or charge over the property. Property includes:

  • Building, bricks and mortar, steel erected buildings, etc.;
  • Plant and equipment,
  • Any vehicles (Cars, Lorries, Buses etc.);
  • fixtures and fittings;
  • particular pieces of machinery;
  • patents;
  • intellectual property.

Preferential Creditors such as Employees and HMRC

HMRC regained preferential status on 1 December 2020. This has impacted the security of floating charge holders and unsecured creditors. Employees retain preferential creditor status for their claims should their employer enter insolvency.

Fixed and floating charges

Normally, the fixed and floating charge is charged under a debenture.

A fixed charge is coupled to an easily identified asset. However, a floating charge floats above ever-changing assets, offering greater business freedom.

Fixed charge creditors

A fixed-charge creditor’s rights mean they hold the property title, meaning the person (company) who allowed the lender a fixed charge relinquished permission to trade or sell the property without the explicit consent of the charge holders.

Floating charge creditors

Floating charges cover all items that the company uses, trades, or sells during the ordinary course of business, where it isn’t possible to refer to a fixed charge holder for permission. However, this can be complicated.

Changes to floating charges on the 15th of September 2003 meant that those charges created before that date floating charge collections were first payable to preferential creditors. Those charges created after means all collections are the first subject to a prescribed PART (The prescribed Part Order).

This is a complicated area. We advise you to seek help as soon as possible.

Please call us on 0330 056 3120 or use our contact form at the top right-hand corner of the page.

Unsecured creditors

Those creditors who have no security over the debt owed to them include:

  • Trade creditors;
  • Suppliers;
  • Unsecured portion of fixed charge debts;
  • Non-domestic rates;
  • claims of some employees.

Connected unsecured creditors

Usually, a director or employee has given money to the company unsecured. Such a payment is, however, referred to as a payment to an associate creditor repaid. Associate or connected creditors cover payments to staff, family members, etc. However, unlike a liquidation, a CVA usually does not benefit from a dividend.

What happens to shareholders when a company goes into liquidation?

Company shareholders in an insolvent liquidation are treated as unsecured creditors. They are last to be paid, if at all.

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