What happens when a company goes into liquidation?

What happens when a company goes into liquidation? What are my options and responsibilities? These are the most common questions asked by directors facing liquidation of a company.

There are two ways a company can go into liquidation; voluntarily or involuntarily. While the exact processes will vary depending on the type of liquidation, the end result will be essentially the same. All of the business’ assets, property and holdings will be sold and the proceeds will be used to repay as many creditors as possible. This will then be followed by the complete dissolution and closure of the company.

company liquidationLet’s take a look at the different types of liquidation and what they mean for your company.

What is compulsory liquidation?

The compulsory liquidation of a company occurs when a winding up petition (WUP) is lodged with the court. This is usually the act of a creditor seeking to recover debts owed by your company. However, in some cases a WUP may be presented by shareholders or any other interested party with a legitimate reason for doing so.

Your company may be at risk of compulsory liquidation is if it fits more than one of the following criteria:

  • Unable to pay debts as and when they become due.
  • In arrears with HMRC.
  • Total debts and liabilities exceed the value of all assets.
  • Number of company members has fallen below the statutory minimum.
  • Failure to appropriately re-register as a public or private company.
  • Has not commenced trading within the statutorily established time of incorporation.

When compulsory liquidation is underway, the selling of company assets begins. Any legal action against the company will usually cease. This is because the company is in the process of being closed down and thus no longer exists as a legal entity.

What is voluntary liquidation?

When a company can no longer pay its bills and debts, and there is little chance of recovery, company directors may choose to enter voluntary liquidation. It must be proven that voluntary liquidation will provide the best outcome for creditors but once this is done, liquidation becomes a fairly straightforward process.

During voluntary liquidation, directors have the benefit of advice and guidance from an insolvency practitioner. The insolvency practitioner will manage the majority of liquidation proceedings, so there is very little for the director to do.

Talking with an insolvency practitioner may help you find alternative solutions to liquidation. Such alternatives (e.g. pre-pack administration) may even allow the business to continue trading.

The financial facts of company liquidation

There are costs involved with company liquidation. If you’re worried about finding the funds to pay for liquidation, you should discuss your options with your accountant or an insolvency practitioner. It may be possible to avoid liquidation and instead dissolve the company and apply to have it struck off at Companies House. This is cheaper than formal liquidation but it is not available to companies with debts they cannot pay.

In voluntary liquidation, you will pay liquidator fees. Before proceeding, find out how much different insolvency practitioners charge, how their fee structures work and if they charge a fixed fee or charge per case.

You may need to raise the money for liquidation costs through the selling of personal assets or via personal finance. Alternatively, if you’re selling your company assets to a trade buyer, they may be willing to contribute to some of the liquidation costs.

Many directors worry about being held personally liable for company debts. The good news is you are not responsible unless you have given personal guarantees to a creditor. In this scenario, you will need to find the funds to repay any debts outstanding following the liquidation. Remember that there are ways to manage debts like an IVA. If you are concerned about taking that step learn to understand how long an IVA lasts to put your mind at ease.

You will also be liable for debts if, after an investigation by the Insolvency Service, you are found guilty of unlawful trading, fraudulent activity, or improper conduct.

What happens after the liquidation of a company?

As the director of an insolvent company, you are likely concerned about what happens to you after liquidation. However, if you have acted promptly and properly, you should have no worries. You are free to carry on as normal, and you can even go on to become director of another company if you wish.

The key thing is that you learn from past mistakes. If you do go on to set up another business, be sure to keep detailed financial information so you always have a complete understanding of the company’s financial position. Failure to make responsible decisions now may lead to a similar situation – or worse – in the future.

By Carl Faulds, managing director, Portland Business Support and Advice.