What is Liquidation?
This post takes a look at what different types of liquidation mean for a business, the steps that are involved in each. We hope you’re here as a result of curiosity, rather than necessity – but if you are in a position where your business isn’t very solvent and you owe creditors, then be sure to take action sooner rather than later. Doing so can be the difference between your business surviving or not, and there are options that may be able to help keep the business afloat if the business is experiencing financial difficulty.
As always with these type of business posts, we’re writing for the UK (as that is where we are based!) and there are different rules and procedures that apply in different countries, and there may be different requirements for different types of businesses. If you are overseas and your business is in financial difficulty, take advice before you get to a position that is irreversible.
What does liquidation mean?
Liquidation is a formal procedure that occurs when a company is brought to an end. Any company assets are liquidated – which is to say, they are sold – and the proceeds of those sales are used to repay any creditors that are owed.
What types of liquidation are there?
There are two main types of liquidation that are used for companies that are insolvent – compulsory liquidation, and creditor’s voluntary liquidation (CVL).
- A compulsory liquidation is pursued by one of the company’s creditors, or by HMRC, after the company has failed to pay a debt of more than £750
- A creditors’ voluntary liquidation occurs when the directors decide to liquidate the company
How does compulsory liquidation work?
This is where a company is forced to shut down by creditors of the company, or by HMRC. The process is started when there are outstanding debts of more than £750 that have been outstanding for more than 21 days, and the time frame looks like this:
- The Winding Up Petition (WUP) is issued. This is a type of court order, which tells the business that the process has begun. After seven days, the Winding Up Petition is advertised in the London Gazette.
- After another seven days, the court will hear the case, and decide whether to issue the Winding Up Order and to appoint an Official Receiver
- The company must stop trading at this point, although this is likely to have happened when the Winding Up Petition was received
- The Official Receiver is appointed and takes full control of the company
- Company assets are sold – this typically includes stock, but also vehicles, property, or machinery that belong to the business. The proceeds of any sales will then be used to pay the debts as far as possible
- The company is then dissolved and the name of the business is removed from the Companies House register
- Any outstanding debts are written off at this point unless a director has provided a personal guarantee. If this is the case, the director becomes personally responsible for repaying the outstanding amount
An investigation into the business and the behaviour of the directors will be happen during the time that the Official Receiver is in charge of the company. If any fraud has been found to have taken place, then directors may be held personally responsible for the debts, and potentially even face disqualification from holding a directorship in future.
How does voluntary liquidation work?
This is a typical timeline of what is likely to happen when a winding up petition is filed:
- The directors meet and formally decide that there will be a general meeting liquidation for the company, in line with the Companies Act 2006. The meeting will need to include the company’s creditors
- When the resolution has been agreed, and advert is placed in the London Gazette to announce the voluntary liquidation of the company. This must happen within 14 days
- It is essential that creditors are informed at least seven days before the meeting
- A statement of affairs must be readied to be presented at the meeting
- The general meeting is held, then the resolution to wind up the company is approved
- One of the directors will be chosen to represent them and officiate the meeting
- When the liquidator is appointed, the directors must cooperate in every way possible. Any information requested should be provided quickly and in full
You can find out more information and technicalities on the government website. The timeline before the company is completely wound up is different from business to business. More complex businesses will take longer to liquidate, and if there are more assets then the process will take longer too.
Advantages of liquidating a company voluntarily
Although the liquidation of a business doesn’t sound like a good thing, if it is likely to happen then there are several good reasons to do so voluntarily.
Protection from being accused of wrongful trading
Since company directors are obliged to act in the best interests of the company and their creditors (and they will be investigated after the process is completed) if they choose to liquidate voluntarily, they may be seen to be acting in the best interests of all parties.
Protection from personal liabilities
If a director (or directors) liquidate their company voluntarily, they are given professional guidance throughout the procedure. This helps to ensure they won’t make any poor decisions that result in them being held personally liable.
Helps to preserve reputation
During liquidation, there is an announcement made in the London Gazette, which means that anyone who cares to look will know the company is going to be liquidated. If the directors opt for a voluntary liquidation, it will be shown that the liquidation is not a hostile action taken by HMRC or by the creditors that are owed.
Finalising the company
If the final few months, or even years of the company have been stressful, with calls from creditors, letters from HMRC and debt collectors making contact, when the decision is made to liquidate the company there is likely to be a huge sense of relief. Once the company is closed, the director has the opportunity to move on, either to another company or to change the direction of their career.
Disadvantages of voluntary liquidation
Both types of liquidation can present distinct problems for directors of companies that encounter either forms of liquidation, but these are the main issues that voluntary liquidation presents.
There may be additional expenses
A typical liquidation will generally cost between £3000 to £7000, depending on the rates that the insolvency practitioner charges, and the amount of work that is involved. Making the decision to liquidate a company voluntarily can be more expensive than a compulsory liquidation, as there are other fees that will apply.
Loss of branding and brand recognition
When there has been a lot of work put into building a recognisable brand, this counts for a lot – especially if there has been a lot of expenditure on activities such as cost per click and social media advertising. When a company is liquidated, this is all lost – so liquidation should be a completely last resort.
When a liquidation process has taken place, the liquidator is obliged to look at the actions of all the directors when the company was insolvent. Where directors are proven to have acted outside the best interests of the creditors, they may face being accused of wrongful trading. This can result in the director found guilty being banned from acting as a directory of a limited company for up to 15 years. That means liquidation isn’t a great way to avoid the responsibility of repaying debt.
The risk of being held personally liable
Voluntary liquidation can look like an attractive prospect, especially if funds are scarce and the cost of rescuing the company will be high. However, directors are legally required to act ethically, and in the best interests of creditors. Ending the company through liquidation will usually end with debts being unpaid, and if the directors use LQ to avoid repaying creditors, there is a good chance they will be held personally responsible for those debts.
What are the alternatives to liquidation?
If there is still opportunity to bring the company back from the brink, it is a good idea to investigate these options – since they will help avoid the issues we’ve just discussed. Other options include:
- Pre pack administration – where the company is sold quickly and assets are transferred to a new company, allowing trade to continue without unmanageable debt or pressure from creditors. This process is governed by strict legislation, it must offer the best result for creditors.
- Company Voluntary Arrangement (CVA) – this allows the company to create a formal payment plan between the indebted company and their creditors. It sometimes allows for some debt to be wiped out completely. It isn’t always possible, since more than 75% of the creditors must consent to the process.
- Asset finance – when companies need capital, they can borrow money against their assets. It can be risky, since if the borrowing company misses payments, the lender can seize the asset and sell it, in order to repay the outstanding debt.
Liquidation is sometimes the answer when a business is in debt and it isn’t possible to recover the business to a viable state. However, it shouldn’t be the first option that is taken, and all avenues should be explored before taking the decision to liquidate a company.
If you are in a business that could encounter a compulsory liquidation, then seeking advice sooner rather than later can help the company stay afloat, or may mean you can take control of the situation before it becomes critical. There are a number of organisations that you can get advice from, and many businesses can be rescued if action is taken.