It is the legal process of turning the company’s assets into cash and distributing it to its creditors. A liquidator ‘winds up’ the affairs of the company after which the company ceases to exist. The purpose of liquidation is to ensure that the company’s affairs are dealt with properly. Creditors do not always get fully paid.
Employee contracts, legal disputes, collection of monies owed, sale of company assets, ceasing the business of the company, distribution of any available funds to creditors and of any available surplus to shareholders, removal of the company from the register at Companies House and dissolution of the company.
Shareholders decide to put the solvent company, which has fulfilled its purpose, into liquidation. All creditors get paid in full, surplus funds are distributed to shareholders and the liquidator then winds up the company.
This is sometimes called a creditors’ voluntary winding up which is initiated by the directors once they realise that the company is insolvent, unable to pay its debts and needs to stop trading. At a general meeting of the company, shareholders pass a resolution to put the company into liquidation and they can nominate an authorised insolvency practitioner as liquidator. The company is therefore stated to be insolvent and the liquidation commences immediately from the passing of the resolution to wind up.
This is sometimes called a compulsory winding up. It occurs when the court makes an order for the company to be wound up – a ‘winding-up order’ – on the petition of an appropriate person, usually a creditor who has not been paid. If there is more than one director, all the directors must jointly present the winding-up petition. It is frequently HMRC which petitions for such a winding up but any creditor seeking payment of a debt above a certain threshold can bring the petition as a means of having the debt paid, even in cases where the company is viable.
Depending on the type of liquidation being undertaken, the liquidator’s duties vary but include running the process, completing the forms, calling all meetings, investigating the conduct of directors where necessary, collecting assets and converting them into cash, paying creditors where possible, distributing any surplus to shareholders and generally dealing with the affairs of the company.
Directors must provide information about the company’s affairs to the liquidator and attend interviews with the liquidator as and when reasonably required. They must look after and hand over the company’s assets to the liquidator together with all its books, records, bank statements, insurance policies and other papers relating to its assets and liabilities.
To ensure that all legal requirements are met, it is usual to instruct a solicitor to deal with issuing a winding up petition. The winding-up process is not simply a matter of completing a petition form and presenting it to the court. The court hearing for example, can result in costs being awarded against either party i.e. the petitioner or the company against whom the petition has been presented. The petitioner should take care to ensure that the winding-up process is used appropriately particularly where the company has good reason for claiming that it does not owe the petitioner the money claimed. The rules and regulations are detailed and specific.
The company could consider writing to all of its creditors to see if a mutually acceptable arrangement can be reached, providing a timetable of when payments will be made.
This is a formal version of the Informal Arrangement described above. The directors would need to apply to the court with the help of an authorised insolvency practitioner, who would supervise the CVA and pay the creditors in line with the accepted proposals.
This procedure gives the company some breathing space from any action by creditors and is managed by an administrator, who must be an authorised insolvency practitioner and whose appointment may be made by the court, by a floating charge holder, by the company or by its directors. The purpose of administration is to enable the company to survive as a going concern or to achieve a better result than in an immediate wind-up or to realise property for the benefit of secured or preferential creditors.
Before you take any action to place a company into liquidation, you should obtain your own legal and financial advice on the liquidation processes and on other alternative options that may be open to you.
When a company gets into financial trouble an administrator may be appointed to help the company through the difficult times and start trading again if possible.
A Company Voluntary Arrangement (CVA) is an insolvency procedure which allows a financially troubled company to reach a legally binding agreement with its creditors.
Liquidation usually means, the company’s trading stop and its assets are turned into cash or “liquidated”. All other possible liabilities, like employment or renting are stopped.
When a company borrows money from a bank on an overdraft or loan, it will be common for the bank to ask for a security (debenture) against such a loan.