What Happens When a Company Goes Into Liquidation?
Company liquidation is the process of closing down a business that can no longer, or no longer wants to operate. It involves selling off the company’s assets to settle outstanding debts, with any remaining funds distributed to shareholders.
Once the company liquidation process is complete, the business stops trading, employees are let go, and the company is officially removed from the Companies House register, meaning it no longer exists. There are three main types of company liquidation: Creditors' Voluntary Liquidation (CVL), chosen when a business can’t pay its debts; Members' Voluntary Liquidation (MVL), used when a solvent company decides to close; and Compulsory Liquidation, initiated through a court order.
While the company liquidation process can seem daunting, it ensures everything is handled fairly and according to legal requirements. Keep reading to explore the three types of liquidation, what happens to a company’s assets, the consequences of liquidation, and practical ways to avoid it.
Types of Company Liquidation
Let's now take a look at the different types of company liquidation in more detail below.
Creditors' Voluntary Liquidation (CVL)
Creditors' Voluntary Liquidation (CVL) is a way for directors to take control of closing down an insolvent business while meeting their legal responsibilities. It’s designed to protect creditors by ensuring their interests come first and preventing unnecessary financial losses.
Letting a company continue trading when it’s insolvent, like taking on more credit that can’t be repaid can lead to bigger problems down the line.
By choosing a CVL, directors bring in a licensed insolvency practitioner to handle everything: selling off company assets, paying creditors, and officially closing the business. Taking this proactive step not only avoids court intervention but also reduces the risk of being accused of wrongful trading, showing that you’ve done the right thing for everyone involved.
Compulsory Liquidation
Compulsory liquidation happens when a creditor takes legal action to force a company to close. This usually occurs if the business owes more than £750 and can’t repay the debt within 21 days. Once a winding-up petition is approved by the court, an Official Receiver or liquidator steps in to handle the process, selling off assets and distributing the proceeds to creditors.
Unlike Creditors' Voluntary Liquidation (CVL), which allows directors to take control and choose their own liquidator, compulsory liquidation is a court-led process and comes with a higher risk of allegations of misconduct. Waiting for a creditor to take legal action rather than proactively addressing financial issues can reflect poorly on directors, making CVL a more responsible and flexible option in most cases.
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation (MVL) is a straightforward way for solvent companies (those that can pay all their debts) to close down operations. It’s often chosen for personal or strategic reasons, like retirement, restructuring, or simply because the business has run its course.
To start the process, directors must declare that the company is solvent, and a licensed insolvency practitioner is brought in to ensure everything is handled smoothly.
MVL works best for companies that distribute £25,000 or more, and it comes with some great tax benefits. Funds are taxed as capital instead of income, and if you qualify for Asset Disposal Relief (previously called Entrepreneurs’ Relief), you’ll pay just 10% tax on the distribution - up to a lifetime limit of £1 million. For businesses ready to wrap things up, MVL offers a tax-efficient and well-organised way to close.
Key Steps in the Company Liquidation Process
The company liquidation process, whether it’s voluntary or compulsory, follows a clear set of steps to ensure everything is handled fairly and properly. While the details might vary depending on the type of liquidation, here’s what typically happens:
Appointing a Liquidator
The first step is bringing in a licensed liquidator to take charge. They’re responsible for managing the entire company liquidation process, from valuing and selling assets to making sure debts are paid and all legal requirements are met.
Valuing and Selling Assets
The liquidator will assess everything the company owns - like property, equipment, vehicles, or stock, and figure out its value. These assets are then sold, often through auctions or private sales, to raise the funds needed to pay creditors.
Paying Creditors
Once the funds are raised, creditors are paid in a specific order:
- Secured creditors with a fixed charge (like those with loans tied to company property).
- Employees, for things like unpaid wages or redundancy payments.
- Secured creditors with a floating charge, such as those linked to stock or invoices.
- Unsecured creditors, like suppliers and contractors.
- Shareholders, if there’s any money left after everyone else has been paid.
Closing the Company
After all the assets have been sold and debts settled, the final step is to officially close the company. At this point, it’s removed from the Companies House register, meaning it no longer exists.
What Happens to the Company’s Assets?
When a company enters liquidation, its assets are sold to repay debts as part of the company liquidation process. This can include everything from real estate, like offices or warehouses, to inventory, machinery, equipment, and even intellectual property such as patents and trademarks.
Any cash in company bank accounts is also included. While assets are generally sold at market value, distressed sales may result in lower prices. The money raised is used to settle debts, and if there’s anything left, it’s distributed to shareholders.
However, accessing funds in company bank accounts during the liquidation process requires a validation order. If those funds haven’t been shared among shareholders before the company is struck off the register, they’ll be transferred to the state. Taking timely action ensures the company liquidation process runs smoothly and avoids unnecessary complications.
Impact on Stakeholders in the Company Liquidation Process
The company liquidation process has a significant impact on everyone involved, from employees to directors and shareholders. Here’s what it means for the key groups:
Employees
For employees, liquidation often brings uncertainty as their contracts are terminated when the company closes. If there isn’t enough money left in the company to cover unpaid wages, holiday pay, or redundancy, they can turn to the government’s Redundancy Payments Service for help. While this provides some financial relief, it’s understandably a tough time for staff.
Creditors
Creditors may recover some of the money they’re owed, but the amount they receive depends on the value of the company’s assets and their priority status. Secured creditors, such as those with loans tied to company property, are at the front of the queue, while unsecured creditors might get only a partial payment or nothing at all.
Directors
For directors, the company liquidation process means handing over control of the business to the liquidator. This can be a challenging moment, especially as they may also face an investigation into their conduct.
If there’s evidence of wrongful trading or fraudulent activity, the consequences can be serious. However, being proactive and following the proper procedures can help directors demonstrate they’ve acted responsibly.
Shareholders
Shareholders are the last to receive any funds from the liquidation process. In most cases, they don’t see a return unless there’s money left over after all debts have been paid - a rare occurrence in insolvency situations.
Liquidation is never an easy process, but understanding how it affects everyone involved can make it a little easier to navigate.
Consequences of Liquidation
The company liquidation process has far-reaching consequences for the business and all parties involved. Here’s what it typically means:
For the Company
Liquidation marks the official end of the business. Once the company is dissolved, it ceases to trade or operate entirely. Its name is removed from the Companies House register, and the business no longer exists as a legal entity.
This finality underscores the seriousness of entering into the company liquidation process, as it represents the closure of all operations.
For Directors
Directors often face significant consequences during and after liquidation. If they are found guilty of mismanagement, wrongful trading, or fraudulent activity, they could be disqualified from holding directorships in the future.
In some cases, directors may also be held personally liable for company debts, particularly if they failed to act in the best interests of creditors when the company became insolvent.
However, directors who act responsibly and follow the proper procedures can protect themselves from further legal or financial repercussions.
For Creditors
Creditors are directly impacted by liquidation, as they may only recover a portion of what they are owed, depending on the proceeds from the sale of the company’s assets.
Secured creditors are prioritised, while unsecured creditors are often left with little or no repayment. This highlights the importance of swift and effective action when a business is struggling financially, as prolonged delays can worsen outcomes for creditors.
Avoiding Liquidation
Facing financial difficulties doesn’t always mean the end of the road for your business. There are proactive steps you can take to avoid entering the company liquidation process and give your company a chance to recover. Here are some effective strategies:
Seek Professional Advice Early
Engaging with a licensed insolvency practitioner early on can make a significant difference. These professionals can assess your company’s financial position, provide tailored advice, and suggest alternatives to liquidation, such as administration or a Company Voluntary Arrangement (CVA). Acting quickly is crucial, as delaying action often limits your options.
Negotiate with Creditors
Open and honest communication with creditors can help you negotiate better terms. This might include extending payment deadlines, reducing the amount owed, or agreeing on a payment plan.
Many creditors prefer to work with a business willing to resolve its financial issues rather than push it into liquidation.
Explore Refinancing Options or Restructuring
Refinancing existing debts or securing additional funding could provide the cash injection your business needs to stay afloat.
Alternatively, restructuring the business—such as selling off non-core assets, merging departments, or downsizing—can help create a leaner, more sustainable operation.
Implement Cost-Cutting Measures
Taking a close look at your expenses and identifying areas where you can cut costs is essential. Whether it’s renegotiating supplier contracts, streamlining processes, or temporarily reducing non-essential spending, improving cash flow can help your business regain stability.
We are here to help!
Navigating the company liquidation process can be challenging, but understanding your options and acting decisively can make all the difference. Whether you’re considering liquidation or exploring alternatives to save your business, taking the right steps at the right time is crucial for a positive outcome.
If you’re facing financial difficulties and need expert advice tailored to your situation, our team is here to help. Contact us today by calling 01992 414222 or emailing sales@creditserve.co.uk.
