What happens when a company goes into liquidation?

When a company goes into liquidation its assets are sold to repay creditors and the business closes down. The company name remains live on Companies House but its status switches to 'Liquidation'. The removal of the name only comes about on dissolution which is approximately three months after the closure of the liquidation.

There are two main types of liquidation process, 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).

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 for both solvent and insolvent companies.

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)
• Compulsory liquidation

What is a 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 as all company assets will be sold as part of the process. 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
• 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.

What is a Compulsory liquidation?

While a company is placed into voluntary liquidation by its directors, in the case of compulsory liquidation, it is a creditor which forces a company into this situation. 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 liquidated in order to realise returns for outstanding creditors.

What happens during solvent liquidation procedure - 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, and a Declaration of Solvency must be signed by the majority of directors attesting to the fact that this will be possible.

• 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.