Whether a company is solvent or insolvent, it is not possible to liquidate a company yourself. Any company liquidation must be handled by a licensed insolvency practitioner (IP).
Unless the company has been issued with a winding up petition by a creditor, the directors of the company make the decision to liquidate it and instruct an IP. So, let’s look at how to liquidate a company.
Types of company liquidation
There are three types of company liquidation in the UK:
- Compulsory liquidation
- Creditors’ Voluntary Liquidation
- Members’ Voluntary Liquidation
With a compulsory liquidation, an insolvent company has been forced to liquidate by their creditors. In a Creditors’ Voluntary Liquidation (CVL), the directors have made the conscious decision to liquidate an insolvent company. For a Members’ Voluntary Liquidation (MVL), the directors have made the decision to close a solvent company.
Can I liquidate a company myself?
In the UK, you are not allowed to liquidate a company yourself. Therefore it is important that you understand exactly how to liquidate a company. It must be handled by a licensed insolvency practitioner. Should a director try to liquidate a company, there will be an investigation by the IP. Fraudulent or wrongful trading may be considered to have taken place and the director could face the situation whereby they may not be allowed to act as a director for any company in the future. In serious situations, they may end up with a criminal record.
Steps to liquidating an insolvent or solvent company
If a company has failed the balance sheet test or cash flow test, they are considered insolvent. In some cases, the company may go into administration whilst a possible business rescue solution is considered. However, in most cases, an IP is appointed to handle the liquidation process on behalf of the insolvent company’s creditors.
The IP, or liquidator, sells off any assets at market value to realise revenue, which is then distributed to the creditors in a priority order, as set out by the Insolvency Act 1986. Once this has been completed, the insolvent company is struck off the Companies House register and no longer exists.
In the majority of cases, the directors opt for a Creditors’ Voluntary Liquidation rather being forced into liquidation by creditors. A CVL procedure allows directors to write off the company’s unsecured debts that haven’t been personally guaranteed by directors.
In the case of a solvent company, the directors may choose to liquidate the company, i.e. close the company, through a Members’ Voluntary Liquidation (MVL). There are a number of reasons why a solvent company may close, such as tax reasons, the company is no longer required or the directors wish to retire.
To liquidate a solvent limited company, the directors must sign a declaration that states there are no current creditors, i.e. any tax arrears with HMRC.
There are five principal steps to liquidating an insolvent or solvent limited company:
- The directors of the company appoint an IP to act as liquidator in the CVL process. This appointment must be approved by the company’s shareholders for the appointment to become official and the liquidation process to commence.
- The directors hand over power and the company’s activities to the IP who starts the liquidation process and manages the company’s affairs.
- The insolvent limited company’s assets are assessed, valued by an independent body and realised (liquidated) at market value. The directors are entitled to purchase any assets but it must be done through the IP and must be bought at market value price.
- Once the IP’s fees have been settled, any realised asset funds remaining are distributed to the creditors by the IP in a priority order, as laid out by the Insolvency Act 1986.
- If there is any surplus revenue, which in most cases there isn’t, this is distributed to the shareholders by the IP.
- Once the IP has concluded the documentation, investigated the directors for any potential fraudulent or wrongful trading, and reported to the court on the liquidation process, they apply to Companies House to have the insolvent company declared dissolved and it is struck off the register.
The process is the same for compulsory liquidation except that the court appoints the IP, or liquidator, following the issuing of a winding up petition by creditors. If the debt isn’t paid within a specified period of time, the court issues a winding up order and a liquidator is officially appointed. The only difference between a voluntary liquidation and a compulsory liquidation is that creditors have forced the company into liquidation rather than the choice being made by the directors of the company.
There is no limit to how long a CVL will take; it really depends on how big the company is, the level of debt and how complex the structure of the company. However, in general, the process can take as little as a couple of months.
An important part of the IP’s role as liquidator is to investigate the activities of the company directors before and during the liquidation process to ensure that there has not been any fraudulent or wrongful trading. Directors must ensure that they have acted responsibly and in the best interests of the creditors. The IP will consider the time frame when the directors became aware that the company was insolvent and they were no longer able to pay their debts.
If any fraudulent or wrongful trading is proved, the directors may become personally liable for all or some of the company’s debts.
When it comes to distributing any realised assets by the liquidator, there is a priority order that must be followed, once the IP’s fees have been paid:
- Secured creditors including those with a legal charge on a company asset
- Expenses incurred by the insolvent estate
- Preferential creditors including employees
- Unsecured creditors
In the case of employees, their wages and any wage arrears, holiday pay and notice pay are covered in accordance with specified statutory limits by the Redundancy Payments Office of the Department of Trade & Industry.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 246 5895.