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Company Liquidation

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A limited company gets shut down formally through the process of liquidation. Before the business is struck off or dissolved from the register kept at Companies House, all business assets will be sold, or “liquidated,” for the benefit of outstanding creditors and shareholders.

After that, the business will no longer be a valid legal entity. The liquidated company has no more debts unless the director personally backed these loans.

When liquidating a company, any assets are used to pay off debts. Any surplus is distributed to shareholders.

The best insolvency practitioners can help insolvent, and solvent companies enter into limited company liquidation in the most tax efficient manner and settle the debts owed.

You will need a validation order to access your company’s bank account. If the money has not been shared amongst shareholders by the time the company has been struck off the register, it will go directly to the state.

What Does Liquidation Mean

When a limited corporation is liquidated, its assets are sold, the business is closed, and the company is taken off the public record.

A type of company liquidation that includes the courts is called Compulsory Liquidation. It happens when a company’s creditors that can’t pay its debts file a “winding-up petition.”

It is the liquidation process your business must go through if it regularly has problems with cash flow and creditors threaten to take action.

Solvent vs Insolvent Liquidation

A company can be liquidated if it is solvent or insolvent. Companies that have gone bankrupt (WUCs) use either compulsory liquidations or creditors’ voluntary liquidations. Members’ Voluntary Liquidations (MVLs) are used for businesses that are still in good financial shape.

The first thing to know if you’re considering liquidating your limited business is that various options are available.

There are three basic types of liquidation, each of which has a different method, even though they all aim to close the firm formally. Putting your business into liquidation mostly depends on its current financial situation.

Liquidation methods

Whether voluntary or required, the process of business liquidation is primarily focused on realising company assets for creditors. Your ideal company liquidation procedure may change depending on the particular circumstances. There are three basic categories of liquidation, namely:

Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) are voluntary liquidation processes that the shareholders and directors start.

Through a court order, creditors like HMRC can start the mandatory procedure.

Compulsory Liquidation

This way of closing down a business involves the courts. It happens when a creditor files a “winding-up petition” because they haven’t been paid for a debt they owe.

A winding-up hearing is held after the petition, and a judge may issue a winding-up order to put the business into compulsory liquidation. An appointed liquidator then dissolves the firm.

A creditor may order a business that cannot pay its debts to close down through a court-supervised liquidation process. HM Revenue & Customs (HMRC) is often the creditor, but any creditor who is owed more than £750 can start the process.

The winding up petition is the first step in the mandatory process. It could become a Winding Up Order when it is heard in court.

As a last option, creditors will frequently use this process to dissolve your company if all other efforts to resolve late payments have failed.

Following a Winding Up order, the Official Receiver or appointed liquidator typically manages the insolvency process.

Failure to cooperate with the Official Receiver can have serious consequences because the behaviour of the directors is reported back to the UK Secretary of State at the conclusion of the liquidation proceedings.

Members Voluntary Liquidation (Solvent Liquidation)

Members’ Voluntary Liquidation (MVL), which can also be used as part of an exit strategy, is the best way to wind down a UK company.

If you wish to close a firm as part of your business plan and pay less taxes, you can think about solvent liquidation. With MVLs, you can pay a 10% capital gains tax on any assets that qualify.

Your business may have outlived its usefulness and be coming to a natural end, or you may choose to take the cash and assets out of business in a way that saves you money on taxes.

The business’s assets will be sold for their fair market value before the business is dissolved.

Creditors Voluntary Liquidation

A resolution passed by an insolvent company and its shareholders can start a creditors’ voluntary liquidation (CVL).

The business that can’t pay its debts must close, and any assets must be given to the creditors. Through this process, the company’s unsecured commercial debts that are not personally guaranteed are forgiven.

Liquidation Process

As a liquidator, a licensed insolvency practitioner is selected.

The directors’ authority ends, and the IP is now in charge of running the business during the liquidation of a company.

The assets of the company are then evaluated and realised (liquidated). If there are creditors, everyone is subsequently paid according to their priority. The shareholders receive any remaining funds (this only applies to solvent liquidation). Finally, the firm is liquidated and removed from the register of companies (Companies House).

How long does liquidation take?

There is no set time limit for closing a business, and because each situation is different, the length of time it takes will vary a lot. In general, voluntary liquidation occurs more quickly than compulsory liquidation.

Depending on criteria, including the size of the company, the full liquidation procedure might take anywhere from three months to a year.

Priority Of Claims

In a liquidation, who receives payment first? The “priority of claims” is what determines this.

The order is as follows:

  1. Secured creditor charges made by the insolvent estate.
  2. The licensed insolvency practitioners preferred creditors, employees, and HMRC).
  3. Unsecured lenders Shareholders.

What Happens to Directors after Company liquidation?

Before dissolving a company, the most important thing for directors to know is that if the company goes bankrupt, their duties change significantly.

The directors must show that they did what was best for the creditors after the company went bankrupt.

Directors should act appropriately and get professional advice to lower the risk of being held personally responsible.

Directors must be aware that once a licensed insolvency practitioner is hired, they must look into the decisions they made as board members in the months and weeks before the company’s liquidation.

The liquidator wants to know if the director put the interests of creditors first as soon as they knew something was wrong. If this isn’t the case, the director could be accused of doing business in a way that isn’t right or honest.

If this is true, the director may have to pay all or part of the company’s debts out of their own pocket.

How much does liquidation cost?

The average cost of liquidating a small business in the UK is between £4,000 and £6,000 plus VAT, but this might vary depending on the company’s size and the number of creditors, among other factors.

Free, Confidential Advice on Liquidation

Get in touch today to talk to a professional about our services and to get free, confidential help with closing a limited company.

You can use our contact page to set up a callback for a time that works for you, or you can use the website to set up a private meeting.

You can also check whether you can close your company even if you have debts to HMRC.

Received a Bounce Back Loan?

Have you taken out a bounce back loan that you are struggling to repay?

Thousands of other company directors are going through the same process, so don’t be alarmed. Whatever situation you find yourself in, talk to a Business Insolvency Company team member if you need to explore your options.

As a director of a firm that has found itself in an insolvent position, choosing to voluntarily turn your company over to a liquidator can help you act responsibly.

As a limited company director, you must meet several legal obligations once you discover that your company is bankrupt. Putting your creditors’ interests ahead of that of the business and its shareholders to pay outstanding debts is one of them.

In essence, you shouldn’t take any actions that might make it harder for creditors to collect their debts, such as adding to your debt or depleting your company’s assets.

It is a good idea for you as a director to talk to a licensed insolvency practitioner about the possibility of creditors’ voluntary liquidation at this time.

Alternatives to liquidation: Company strike off

Even though declaring a corporation in liquidation is the official procedure for closing a firm, this is not the only way to do so. A complete liquidation procedure won’t always be necessary. Alternatively, the corporation can be dissolved, often known as “struck off.”

A business “strike off,” which is sometimes called “dissolution,” is a non-official way for a company to be taken off the Companies House registry. Its directors must file a DS01 form and pay the necessary money to accomplish this.

If there are no objections, the firm will be removed from the register when a notice of the application for strike-off is published in the Gazette.

As soon as it is removed from the register, it loses its legal status. Even though it’s often faster, easier, and cheaper than going out of business, you should know that it’s not right for all businesses and situations.

Other cheap ways to liquidate a company may be a better option for you.

Businesses that have outlived their usefulness and are no longer needed by their directors or shareholders should be dissolved. Ideally, they should be bankrupt at the time of strikeoff.

If an insolvent company, which is one that hasn’t paid its debts, tries to be struck off, a creditor will probably object. If this happens, the process will be stopped, and the company will keep running. If your company owes money, it is in the best interest of your creditors to keep it from being struck off the register. Once a company is dissolved, it is hard to get the money back without going through a long and hard process to get it back on the register.

On the other hand, if your business has any assets, such as cash in the bank, these become “bono vacantia” upon strikeoff, with ownership passing to the Crown. So, if your company has debts or assets, liquidation is the best way to close it down and take care of any unfinished business.

Your entitlement to director redundancy

When a company has money problems and has to go through liquidation, all employees must be let go. Former employees may be eligible for redundancy and other statutory benefits as compensation for losing their positions, depending on how long they worked for the company.

But many people don’t know that qualified directors can also ask to be let go when the company goes out of business. This is because directors are frequently considered to be business workers.

You will likely have a strong case for redundancy if you receive a wage through PAYE, have worked for the company for more than 16 hours per week, and have done so for at least two years.

Your length of service, age at the time of redundancy, and pay earned will all impact the amount you may be eligible to claim. Along with redundancy, you might be eligible to file a claim for other legal benefits such as notice pay, holiday pay, and arrears of wages. These extra benefits could significantly boost your total redundancy payment.

When the company undergoes a formal liquidation process (such as a CVL) instead of being struck off, redundancy is an option. Redundancy doesn’t apply to solvent Members’ Voluntary Liquidations (MVLs) either; it’s only an option when a company has been liquidated because it’s insolvent.

The need for expert liquidation advice

Expert advice is important if you want to make the best decision for you and your business, whether you’ve decided to leave a profitable business and want to get the profits locked up in the business or if the business can no longer pay its bills because it has more debt and less money coming in.

Company liquidation may be the solution, but you must keep in mind that this is a significant step to take whether the company is solvent or insolvent, so you must get professional guidance to make sure it is right for you and your business.

An authorised insolvency practitioner will be able to talk to you about your options, explain their pros and cons, tell you if you are eligible for redundancy, and give you professional advice on what to do next.

If your company becomes bankrupt, you may have to stop doing business immediately to protect company assets and creditors from further losses. In other cases, continuing to do business may be wise if doing so will ultimately increase the amount of money that creditors have access to.

You may not know if continuing to trade is right until you talk to a professional insolvency practitioner. If you make a mistake, you could be held personally responsible for any damages that creditors suffer.

The role of an insolvency practitioner in company liquidation

Liquidation is a legal insolvency procedure that can only start if a licenced insolvency practitioner is appointed.

They will take on the role of the liquidator and be in charge of several tasks during the process, such as talking to creditors, finding and claiming the company’s assets, and dividing the money from these according to a set hierarchy.

Shareholders will get the proceeds of a solvent liquidation, but the company’s outstanding creditors will split any recoverable funds in the case of an insolvent liquidation.

Get In Touch

If your company is dealing with unsustainable debts, tight cash flow, or an uncertain future, you are not alone.

Every day, we meet with corporate directors just like you, and we’re here to provide you with the assistance and counsel you require.

Whether you are looking to liquidate your company or start a Phoenix Company after liquidation, we can give you professional advice today.

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