What Happens When A Company Goes Into Liquidation?

Corporate liquidation is the winding down of a company that can no longer pay its debts. It sees a limited company cease operations before company assets are sold off to pay the company’s debts.

The liquidation of a company is only a last resort, and it will be the final response to insolvency and financial distress. Limited company liquidation can be either voluntary or it can be court-ordered, but the final result in either case is the same: the company stops trading and is struck from the Companies House register.

If you’re considering the liquidation of a company, the experts at Irwin Insolvency are here to explain what happens when a company goes into liquidation.

What Is the Liquidation of a Company?

Company liquidation is a legal process that results in a limited company in the United Kingdom stopping operations and winding up. The liquidation of a company results in that company being struck from the Companies House register and effectively ceasing to exist.

Corporate liquidation most commonly occurs as a result of the company in question facing financial difficulty, although it’s generally only used as a last resort when other efforts to turn the company around have failed.

Corporate liquidation ordinarily occurs when a company has become insolvent, when their creditors are chasing them for payments and they can no longer pay their debts. The limited company liquidation process sees the company’s assets sold off in order to pay off as many of their debts as possible.

Corporate liquidation can be court-ordered, a process that begins when creditors attempt to recoup the money owed to them by having the company liquidated. In some cases, directors may voluntarily wind down a company for other reasons – if they no longer want to continue the business or wish to retire, for example.

There are three main types of corporate liquidation:

• Creditors’ voluntary liquidation (CVL)
• Members’ voluntary liquidation (MVL)
• Compulsory liquidation

Let’s take a look at these in more detail.

Creditors’ Voluntary Liquidation (CVL)

Creditors’ voluntary liquidation occurs when a company has become insolvent, and the shareholders and directors agree that the only remaining course of action is liquidation. This is a voluntary form of liquidation, and it allows the company to retain some measure of control over the winding-up process. Creditors are notified of the company’s impending liquidation and, where possible, as many creditors will be paid once the sale of the company’s assets is complete.

Members’ Voluntary Liquidation (MVL)

Members’ voluntary liquidation is a process undertaken when a company is still solvent and profitable. The directors agree that they wish to close down the company. This could be done for many reasons, including the owners wishing to retire or wanting to make a profit while they can. The MVL process sees the company’s assets sold off and any outstanding debts paid before the profits are divided amongst shareholders.

Compulsory Liquidation

Compulsory liquidation results in the forced closure of a business against the desire of the directors and shareholders. Compulsory liquidation occurs when a company’s creditors petition the court to wind up the business, often after all other attempts at recouping their money have failed. If the petition is successful, the company can be liquidated and the creditors are paid back their money from the proceeds accrued through the sale of the company’s assets.

Because there are several types of limited company liquidation, it’s important to seek independent financial advice if you’re considering liquidating your business. As corporate liquidation results in the total closure of a company, there may be other options available to you before this final step needs to be taken.

What Happens If a Limited Company Goes into Liquidation?

So what happens when a company goes into liquidation? The process depends on the type of liquidation being undertaken by a company, but the results will ultimately be the same.

Here’s an overview of what happens when a company goes into liquidation:

1. The decision is made to liquidate the company. This can be voluntarily approved by the company directors or it can be enforced by the courts in the case of compulsory liquidation.
2. An insolvency practitioner is appointed to oversee the liquidation process. They decide the best way to liquidate the company and begin taking action to ensure the process occurs as smoothly as possible.
3. If liquidation is voluntary, then all creditors must be notified of the impending liquidation process. They have the right to oppose the liquidation or to suggest their own choice of insolvency practitioner.
4. A winding-up resolution detailing the liquidation process is completed, and this is formally voted on by shareholders. The liquidation is advertised in the Gazette to become public knowledge, while Companies House is notified of the impending liquidation.
5. Now the liquidation officially begins, as employees and customers are informed of the winding-up process and company assets are sold off.
6. Once assets have been sold, the insolvency practitioner divides the proceeds from the sales between outstanding creditors. Anything left over is paid to the shareholders.
7. Finally, the company is struck from the Companies House register and is officially liquidated.

In terms of dividing the money raised through the sale of assets, the insolvency practitioner must follow a sequence determined by law. The sale of assets doesn’t ensure that every creditor gets paid, as there may not be enough cash to do so. The proper sequence therefore establishes who gets paid, and in what order.

Preferential creditors receive their money first. This includes the insolvency practitioners, followed by creditors such as banks who have issued secured loans to the company. After secured loans have been paid off, the remaining money is distributed to the unsecured creditors. This includes creditors who have provided services or supplies on account and were never paid, and employees who may still be owed wages.

Once all creditors are paid, any leftover money is distributed amongst the shareholders. In the case of compulsory liquidation or a CVL, there may not be enough money to pay off all the creditors, let alone shareholders, and creditors may miss out on what’s owed to them. In the case of an MVL, where the company is liquidated when still solvent, the shareholders are likely to see a large share of the proceeds, making this a potentially lucrative way to wind up and sell the company for a profit.

How Much Does It Cost to Liquidate a Limited Company?

To liquidate a company, an insolvency practitioner has to be appointed to oversee the winding up of the business. The cost of corporate liquidation always falls on the company that’s being liquidated, and costs vary from one liquidation to another.

Costs will be incurred whether the liquidation process is voluntary or compulsory, and the insolvency practitioner raises the funds for their payment through the sale of company assets. In effect, the insolvency practitioner becomes a preferential creditor, and they ensure that they receive their payment before distributing the remaining funds to other creditors.

The main factors that affect the overall cost of liquidating include:

• The size of the company being liquidated
• The time it takes to liquidate the company
• The complexity of the liquidation

If a company has multiple departments or offices, the costs for liquidation will be higher, as the process takes on added complexity and takes more time. If there are legal disputes with creditors or disputes with employees about the liquidation process, this can again raise the costs incurred by the insolvency practitioner.

Can I Just Close My Limited Company?

If your company is sitting idle and hasn’t been trading for several months, you may wish to wind the company up voluntarily in order to avoid having to file annual reports and tax returns. This is a different process to liquidation but also results in the company being struck from the Companies House register.

In order to dissolve a company, there are several criteria that must first be met:

• The company hasn’t been trading for a minimum of three months.
• There are no remaining assets in the company name.
• Any outstanding creditors have given their permission for the company to be dissolved.
• The company has not changed its name or sold any assets for three months.

If your limited company meets these criteria, then you can apply for the company to be struck from the register. The application process is assessed by Companies House and, if successful, the company will be dissolved and will no longer be able to operate.

But the dissolution process is only used by companies that are still solvent when they wish to wind down. Any outstanding creditors are likely to want their money back, so they have the right to block the dissolution process.

Can You Liquidate a Company with Debt?

If your company’s debts are beginning to pile up, you may be wondering if you can simply liquidate the company to wipe out its debts. Companies with debts can be liquidated but, as with the dissolution process, this can only occur with the backing of creditors.

For this reason, a members’ voluntary liquidation process can only occur if a company is still solvent. If the company has debts, then a voluntary liquidation isn’t possible, as the creditors will likely stop this from happening in order to recoup their losses first.

Companies with debts can instead initiate the creditors’ voluntary liquidation process. This is done with the agreement of the directors and shareholders, and sees an insolvency practitioner appointed to oversee the smooth winding up of the business. A CVL allows creditors to still be paid and a company to be liquidated when it has outstanding debts.

Remember, liquidating a company just to get rid of debt might not be the best option available to you. We recommend speaking to an insolvency practitioner for advice before initiating any liquidation process.

Can HMRC Pursue a Dissolved Company?

In many scenarios, HMRC will commonly be one of the largest creditors to which a company owes money. Indeed, large corporate tax bills can often be the cause of a company’s insolvency if they have failed to adequately budget or organise their corporate finances.

Recent changes to insolvency legislation ensure that HMRC is now a preferential creditor when a company is liquidated. Previously, HMRC was not considered a preferential creditor, meaning that unpaid taxes would only be paid if there was money left over after the sale of the company assets and distribution of the profits. Now, HMRC can claim certain taxes as a preferential creditor, including VAT payments, Income Tax and National Insurance payments.

If your company fails to pay its taxes, HMRC can still pursue the company even after it’s been legally liquidated. If your business has kept thorough tax and accounting records throughout its trading life and has always attempted to pay its taxes on time, this shouldn’t be an issue. As a company director, you have limited liability, so the company’s tax debts would not be your personal responsibility.

However, HMRC is also able to open investigations into a company’s tax history even after the liquidation process has come to an end and the company has been struck from the register. This can happen for a number of reasons, but the main reason for an investigation would be an allegation of fraud or wrongful trading. HMRC investigations can go back as far as 20 years, and if they find evidence of wrongdoing, a company director can become personally liable if they’re deemed to have acted irresponsibly or fraudulently. HMRC can even place a company back onto the Companies House register in order to pursue claims against the directors.

Contact Irwin Insolvency Today for Your Free Consultation

With decades of experience dealing with insolvency matters, our licensed insolvency practitioners can offer impartial advice and expertise to help your business through the company liquidation process.

If your company is considering liquidation, don’t hesitate to contact Irwin Insolvency today for your free, no-obligation consultation.