Understanding the liquidation process
When a company can no longer financially continue to operate, it may need to go into liquidation. While this might be a common term that many people have heard of, there’s often a lot of confusion around the liquidation process and what it involves.
In this article, we break down the process to help you gain a better understanding. Let’s begin by first defining what it is.
What is liquidation?
In short, liquidation is the process that happens when a business officially stops running, but has outstanding debts. It involves turning the company’s remaining assets into cash so it can be used to settle its debts, as much as can be afforded. This may include equipment, vehicles, stock and property. In most cases there are not enough assets to settle the creditors in full and therefore once all assets are realised, and the administrative works are complete, the Liquidator will then close the liquidation and dissolve the company leaving creditors paid only to the level of available assets after costs.
What are the different types of liquidation?
In the UK, there are three main types of liquidation. The type of liquidation process a company takes depends on the circumstances of its closure. Here are the three main types of liquidation:
- Creditors’ Voluntary Liquidation (CVL): This type of liquidation is the most common and occurs when a company can’t pay its debts, such as bills, invoices or wages. Faced with this financial situation, the directors voluntarily chose to close down the business before any legal action to liquidate the business is taken by its creditors.
- Compulsory Liquidation: This is when a company’s directors are forced to close down the business, and go into Liquidation, by an action taken by the Company’s creditors. In this type of liquidation, the courts issue a winding-up order and appoint an official receiver to take over and manage the liquidation process. A liquidator can then be appointed after if any assets remain.
- Members’ Voluntary Liquidation (MVL): Different to the others, this is the route solvent companies often take. In other words, those who can pay all of their debts but have chosen to wind down the company, usually to benefit from tax relief. This is often used by directors who are no longer wishing to trade the business or are seeking to retire. An alternative to this type of liquidation is dissolution but the funds the directors take out at close are typically at a higher tax rate in dissolution.
What happens during liquidation?
The exact process will vary depending on the type of liquidation. But these key steps are usually followed in every liquidation process:
- A liquidator is appointed to take control of the company, liaise with creditors and ensure that everything is done as it should be and in accordance with the law.
- Company assets are sold to help raise cash to settle the company’s debts. This may include selling unsold stock, office equipment or company vehicles.
- Creditors are paid using the money raised from selling the assets. The liquidator will ensure that creditors are paid in the correct order or secured creditors first, then the redundancy payments service for the sums paid to employees preferential, then HMRC, then floating charge creditors and lastly, unsecured creditors (virtually everyone else).
- If any funds are left over, they will then be distributed between the shareholders. This is more likely to happen in an MVL rather than a CVL or compulsory liquidation.
- Once all the financial matters have been completed, the company will then be formally closed. It will be removed from the Companies House register and no longer exist.
How does liquidation affect different people?
Liquidation affects different groups of people in a variety of ways. Firstly, it can be a tough and stressful time for directors. Especially if they have spent a lot of time and investment in building the business, only for it to fail. But, taking early action can limit the stress and legal implications they could face further down the line.
For employees, it can be a worrying time. Not only have they lost their jobs, but they also face delays in being paid their final salary. However, they may be entitled to claim redundancy pay, outstanding wages and holiday pay through the Government’s Redundancy Payments Service.
Lastly, creditors risk not getting all of the money that’s owed to them. However, liquidation ensures that the process is fair and follows legal procedures.
Looking for liquidation advice?
If you’re worried or concerned about your business’s financial situation or want to formally close your business for other reasons, please contact the trusted team at Bridge Newland for free, impartial liquidation advice.
Categorised in: Liquidation News, Services & Solutions
