Updated: 2nd December 2021
Once a company is no longer required, or if its financial problems have taken it beyond the point of rescue, the business can be closed through a process known as liquidation. The way in which a limited company is liquidated will be determined by the financial state of the business – essentially whether it is solvent or insolvent.
If you are thinking of closing down your company (whether solvent or insolvent), the process begins with a resolution to ‘wind up’ the business. This decision is usually made by the shareholders and/or directors of the company, however, in the case of compulsory liquidation, the creditors of the company can petition the court for the liquidation.
A ‘winding up resolution’ leads to the liquidation of company assets by a licensed Insolvency Practitioner, with the intention of either repaying creditors or distributing the money realised to shareholders.
Directors can voluntarily wind up their company or creditors can take the initiative if they are owed a minimum debt of £750. This figure has increased to £10,000 as per the Government's temporary measures which will apply for the period 1 October 2021 to 31 March 2022. This is done by petitioning the court for a compulsory winding up order.
Assuming that the company has no debts or is able to repay them in full before closure, the process followed is called a Members’ Voluntary Liquidation, or MVL. This is often used by directors wishing to retire, or by a group of companies that want to close down a defunct subsidiary.
The Creditors’ Voluntary Liquidation process also involves voting a resolution to wind up the company. In this instance, however, the reason is to avoid further debts and minimise further losses to creditors.
Trading while knowingly insolvent carries with it a risk of disqualification as a director, financial penalties, and a prison sentence in the more serious cases. It is important therefore, to recognise when there is no hope of business recovery, and to put creditor interests above those of the shareholders.
During the liquidation process, creditor interests take precedence over those of directors, shareholders and members. Directors must act with integrity and are obliged to provide the IP with all the information needed to carry out this process.
Compulsory Liquidation occurs when action by creditors forces a company to close down. Any creditor can apply to the court for a winding up order if they have sent a 21-day Statutory Demand for a debt of more than £750 (temporarily £10,000) which remains unpaid.
Once passed by the court, a winding up order seals the fate of a company delinquent on payments to secured or unsecured creditors.
There are several issues that directors need to take into account when their company is liquidated in this way:
The liquidator is obliged to investigate the conduct of directors as part of any liquidation process. A report is sent to the Secretary of State detailing any concerns regarding their conduct during the time leading up to the company becoming insolvent.