What happens when a company is liquidated?
What happens when a limited company goes into liquidation?
A company going into liquidation has the liquidator sell company assets to pay off their debts, and the company closes. The name of the company remains registered at Companies House. However, notes the registered name is in ‘Liquidation’.
The name removes 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
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. A majority of the company directors must, however, sign a declaration of solvency to confirm that 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 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 realised, liquidation costs 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 up to the date liquidator 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:
- unpaid wages;
- holiday pay unpaid;
- Any other outstanding amounts.
For certain payments, they are dealt with as preferential creditors; for other debts, they are unsecured creditors, and therefore placed further down the payment chain for payment.
Once in liquidation, those who remain eligible may claim redundancy pay along with any 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?
A liquidator once appointed has a primary aim to realise assets. To achieve this, they may exercise their considerable powers to realise company property, bring or defend proceedings or disclaim onerous property.
Most contracts terminate or have the right to terminate in the event of liquidation of the company, 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 director of the company.
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 rank high when paid, as they have security over the debt secured with collateral. They have a legal right or charge over 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;
- intellectual property.
Preferential Creditors such as Employees and HMRC
HMRC regained preferential status, with effect 1st December 2020. This has impacted the security of floating charge holders and unsecured creditors. However, employees retain preferential creditors status for their claim 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 freedom for a business.
Fixed charge creditors
A fixed charge creditor’s rights mean they hold the title of the property, meaning the person (company) who allowed the lender a fixed charge had relinquished permission to trade or sell the property without the explicit consent of the charge holders.
Floating charge creditors
Floating charge works cover all items that the company uses, trades, or sells during the normal course of business, where it isn’t possible to refer to a fixed charge holder for permission. This can however, be complicated.
Changes to floating charges on the 15th September 2003 meant that those charges created prior to that date mean floating charge collections are first payable to preferential creditors. Those charges created after means all collections are 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 0800 612 5448 or use our contact form at the top right hand corner of the page.
Those creditors who have no security over the debt owed to them include:
- Trade creditors;
- Unsecured portion of fixed charge debts;
- Non-domestic rates;
- claims of some employees.
Connected unsecured creditors
Normally, 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 that is repaid. Associate or connected creditors covers payments to staff, family members, etc. However, in a CVA, they usually do not benefit from a dividend, unlike a liquidation.
Company shareholders in an insolvent liquidation are treated as unsecured creditors. They are last to be paid, if at all.