Liquidation involves winding down the company’s operations, selling its assets, and distributing the proceeds to creditors and shareholders.
However, this process comes at a cost, and it is crucial to understand the financial implications and who bears the responsibility for these expenses.
In this guide, we’ll take a look at how much it costs to liquidate a limited company and who has to foot the bill.
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How Much Does it Cost to Liquidate a Limited Company?
The cost of liquidating a limited company in the UK typically ranges from £4,000 to £5,000 + VAT for a small insolvent business. The exact amount can vary based on factors such as the company’s size, asset complexity, number of creditors, and the hours required by insolvency practitioners to meet statutory obligations.
The key determinant in the liquidation cost is whether the company is solvent or insolvent, as this dictates the specific type of liquidation process required.
There are two types of voluntary liquidation procedures:
- Members’ voluntary liquidation (MVL) – An MVL is a formal procedure governed by the Insolvency Act 1986 that’s used to close down a company that can afford to pay its debts. An MVL is suitable for companies that have assets to realise, with the proceeds distributed among the shareholders in the most tax-efficient way. Shareholders can claim Entrepreneurs’ Relief on the distributions if they meet the relevant criteria.
- Creditors’ voluntary liquidation (CVL) – A CVL is a formal insolvency procedure that’s used to close down a company that has outstanding debts it cannot repay and assets that must be realised for the benefit of its creditors.
Whichever procedure you use, it’s important to note that liquidation is terminal. Once the liquidation has been completed, your business will cease to exist. In the case of an insolvent business, you may choose to purchase the assets of the liquidated business and start again under a different business name, in which case, you should factor the price of those assets into the overall cost of liquidation.
Who Pays for the Liquidation of a Company?
When a company embarks on the challenging journey of liquidation, concerns about covering the associated expenses inevitably arise. These costs, primarily stemming from liquidator’s fees, can weigh heavily on the minds of company directors, particularly for insolvent entities.
In most cases, the liquidator’s fees are settled from the funds generated by the sale of company assets during the liquidation process. The liquidator prioritizes their fee before distributing the remaining funds to creditors in a prescribed order.
However, in scenarios where the insolvent company lacks sufficient assets or funds to cover the liquidator’s fees, the responsibility shifts to the company directors or a third party. Here are the potential solutions:
1. Director’s Personal Funds:
If the company’s financial situation is dire and the liquidator’s fees cannot be covered through asset sales, directors may opt to use their personal funds. This could involve dipping into savings, accessing personal credit products like credit cards or personal loans, or even liquidating personal assets. When directors utilize personal funds for creditors’ voluntary liquidation (CVL), the insolvency practitioner typically charges a fixed pre-appointment fee, eliminating post-appointment fees.
2. Third-Party Funds:
In cases where company assets and cash reserves are insufficient, a third party known to the director may step forward to finance the liquidation costs. Under such circumstances, the liquidator usually agrees to only a pre-appointment fee.
In conclusion, while liquidator’s fees are typically covered by asset sales, directors and third parties may need to step in when funds are scarce.
How are Liquidation Fees Paid?
The liquidator’s fees may be paid from different sources. These include:
- Initial Payment: An initial payment may be made from the company’s remaining assets, if any, before the sale of assets begins. This provides the liquidator with immediate funds to cover initial expenses.
- Payments from Asset Sales: As assets are sold, a portion of the proceeds may be used to pay the liquidator’s fees.
- Payment from Directors or Third Parties: If the company’s assets are insufficient, the directors may be personally liable for the remaining fees. Alternatively, a third party, such as a shareholder or creditor, may agree to pay the fees.
Liquidation fees are primarily paid to the insolvency practitioner, the individual or firm appointed to oversee the liquidation process. Their fees are a reflection of their expertise, time, and effort in handling the complex process of winding down a company.
What Do Liquidation Costs Cover?
This will cover the cost of:
- Settling legal disputes with creditors and any outstanding contracts
- Making employees redundant and processing their claims for money they’re owed
- Collecting debts owed to the business including those owed by the company directors
- Inviting and processing creditor claims
- Providing regular updates to the company’s creditors
- Investigating the reasons for the company’s insolvency
- Valuing and selling the company’s assets
- Distributing the proceeds of the assets to the creditors
- Submitting the relevant paperwork to Companies House and HMRC and dissolving the company
What if my Company Cannot Afford to Pay for the Liquidation?
If your company cannot afford to pay the liquidation fees, there are a few options available to you:
- You may have to use your personal funds to pay the fees.
- It may be possible to negotiate a payment plan with the liquidator.
- If you do not take any action, a creditor may eventually apply to the court to have your company wound up. This is a legal process that can have serious consequences for you and your company.
How Much Does a Solvent Liquidation Cost?
The cost and fees of a members’ voluntary liquidation generally start at around £2,000 plus VAT. That’s the fee for a simple MVL, where the company has no outstanding liabilities, and the only asset is cash in the bank. This will cover the cost of:
- Drafting and submitting the relevant paperwork to Companies House
- Searching for any liabilities and paying creditors’ claims in full
- Calculating and distributing funds to shareholders
- Obtaining clearance from HMRC to liquidate and dissolve the company
- Disbursements (Statutory Adverts, Statutory Bond)
The cost will rise in more complex cases where there are physical assets such as buildings, vehicles and machinery that must be realised, with the proceeds distributed in accordance with the company shareholding.
Who Pays for a Members’ Voluntary Liquidation? – The insolvency practitioner’s fee will be approved by the shareholders and will usually be taken directly from the assets of the company in liquidation. That means there will not usually be an upfront fee to pay. For the vast majority of solvent companies, the liquidator’s fees are nominal when compared with the sum the company’s shareholders receive.
Do you want advice about the costs and fees of liquidation?
Call 08000 24 24 51, email email@example.com or complete an enquiry form to discuss the best way to close your limited company with a licensed insolvency practitioner. We’ll explain your options and provide free, no-obligation advice to help you make the right decision for you and your company.