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What happens when a company goes into liquidation?

When a company goes into liquidation its assets are sold to repay creditors, the business closes down, and its name is removed from the register at Companies House. There are two different types of liquidation process, however, solvent and insolvent liquidation.

Solvent liquidation usually involves a director’s retirement, or may be the closure process chosen when a business serves no further useful purpose. This is called a Members’ Voluntary Liquidation (MVL).

Contrastingly, insolvent liquidation occurs when a company cannot carry on for financial reasons. The overall aim of an insolvent liquidation process is to provide a dividend for all classes of creditor, but it is often the case that unsecured creditors receive little, if any, return.

Begbies Traynor are licensed insolvency practitioners with vast experience in all industries, and are available for appointment as liquidator.

Insolvent liquidation procedures

Insolvent liquidation means that a company is closing because it cannot pay its bills as they fall due (cash flow insolvency), or the value of business assets is less than its liabilities (balance sheet insolvency).

There are two insolvent liquidation processes:

Creditors’ Voluntary Liquidation (CVL)

When creditors are threatening to take legal action against a company, and there is no real hope of rescue or recovery, it is often in the interests of all parties to enter a Creditors’ Voluntary Liquidation.

This process maximises creditors’ potential to receive a return, and helps directors to avoid future accusations of wrongful trading. The appointed liquidator works on behalf of creditors as a whole rather than company directors, and their main role is to collect in and realise all business assets.

Brief timeline of a CVL

  • Shareholders vote on whether to pass a ‘winding-up resolution’ and place the company into voluntary liquidation
  • The winding-up resolution is sent to Companies House within 15 days of the shareholder vote
  • A notice must also be placed in the Gazette within 14 days
  • 75% or more (by value) of creditors vote on whether to accept the IP’s proposal, and on the appointment of a liquidator to carry out the process
  • Assets are realised, and funds distributed among creditor groups, according to the statutory hierarchy of repayment
  • The conduct of directors leading up to the insolvency is investigated for instances of wrongful or illegal trading.

Compulsory liquidation

Although a company can be placed into compulsory liquidation by its directors, it is more often the case that a creditor forces a company into this situation to recover their money. If a creditor is owed £750 or more by the debtor company, they may be eligible to petition the court for its winding-up.

If the courts then grant a winding-up order, a liquidator is appointed and business assets are realised. Again, directors face investigation by the Insolvency Service, but because the liquidation was enforced, these investigations may be more rigorous than those following a CVL.

The aim is to uncover the cause of insolvency, and determine whether there were any instances of misconduct, wrongful trading, or illegal activity by directors. If any such activity is found directors face disqualification for between two and 15 years, and potential criminal charges if fraud is involved.

Solvent liquidation - MVL

An MVL procedure also requires the input of a licensed insolvency practitioner, and results in the closure of a company following distribution of its assets amongst creditors and shareholders.

Because it is a solvent liquidation process, creditors are repaid in full, but a Declaration of Solvency must be signed by the majority of directors.

  • No more than five weeks later, shareholders pass the resolution needed to wind-up the company, and appoint a licensed IP to administer the process
  • A notice is placed in the Gazette within 14 days of the resolution being passed, and the signed Declaration of Solvency needs to be sent to Companies House within 15 days

What does a liquidator do?

As we have mentioned, the appointed liquidator will realise company assets and make distributions to creditors. Although these are the main responsibilities, a liquidator will carry out other tasks, including:

  • Dealing with any outstanding contracts
  • Dispensing information to creditors throughout the process
  • Removing the company from the register at Companies House
  • Interviewing directors as part of their investigations

If you require more information on corporate liquidation, our experts at Begbies Traynor can help. We offer an initial appointment free-of-charge to quickly establish your needs.

 

 

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