How to Liquidate Your Company in the UK

Liquidating a company in the UK is a significant decision, often made in challenging circumstances. This process involves formally closing down a business and resolving all its financial matters. Our guide provides a clear, step-by-step approach to navigating this complex procedure.

Whether you’re a director of a limited company facing insolvency or considering voluntary liquidation, this article will outline the key steps, legal requirements, and practical considerations involved in the liquidation process.

Should I Liquidate my Company?

There are two classic tests to determine whether a company is insolvent:

• Cash flow test: This test examines whether the company can pay its liabilities as and when they fall due. If the company is unable to meet its daily costs, it is essentially insolvent.
• Balance sheet test: This test compares the company’s assets and liabilities. If the company has more liabilities than assets, it is insolvent.

If either of these tests proves correct, you should speak with an insolvency practitioner to understand your options. Liquidation is one course of action, but there may be others that could help you keep your company running.

What are the Options for Liquidating my Company?

If you are a director facing insolvency, and have not yet been forced into compulsory liquidation, you have one option only: Creditors’ Voluntary Liquidation (CVL).

This is because, once a creditor has obtained a court order to wind the company up, the company is out of your control and you will no longer have any say in the liquidation process.

In a CVL, you, as the director, appoint a liquidator to oversee the liquidation process. The liquidator will then sell off the company’s assets and distribute the proceeds to its creditors, in order of priority.

Once the CVL process is complete, the company will be dissolved and will cease to exist.

It is important to note that CVL is not a get-out-of-jail-free card for directors. If you have been found to have mismanaged the company or acted in a fraudulent manner, you may still be held personally liable for the company’s debts.

However, CVL is the best way for directors to minimize their personal risk when faced with insolvency. It is also the only option available to directors who have not yet been forced into compulsory liquidation.

Therefore, if you are a director facing insolvency, you should seek professional advice from a qualified insolvency practitioner as soon as possible. They can help you to understand your options and to ensure that you follow the correct procedure.

How to Liquidate Your Company

The liquidation process typically begins with a director contacting an IP to discuss their options. Once the IP is appointed, the company will cease trading and the directors’ powers will cease.

The IP will then be responsible for the following:

• Making a full assessment of the company’s situation, including an overview of assets and liabilities.
• Dealing with creditors and explaining the liquidation process to them.
• Converting the company’s assets into cash and paying creditors in order of priority.
• Striking the limited company off the register at Companies House.

Directors have no active role in the liquidation process once the IP is appointed.

Appointing An Insolvency Practitioner to Act as Liquidator

If your company is choosing voluntary liquidation, then you will need to make contact with an insolvency practitioner to act as liquidator.

These must hold a licence from one of the official regulatory bodies, of which there are 9 in the UK.

It’s important to appoint someone whom you feel undertands your situation well and who will do everything they can to support you through it.

Despite this, all insolvency practitioners have a statutory responsibility to investigate the actions of company directors in the period running up the the insolvency. This is to check for possible directorial conduct as wrongful or fradulent trading.

The Role of the Offical Reciever

When a company is placed into compulsory liquidation by the court, the Official Receiver (an officer of the Insolvency Service formally attached to a particular court) becomes the provisional liquidator.

In some situations, the Official Receiver will then make a recommendation for the appointment of an Insolvency Practitioner who would then take over part his role. This situation commonly arise when speed is of the essence: for example if some of the company’s assets were perishable goods, or when the case is complex.

Even when the OR does recommend the appointment of another IP, he/she will still conduct the directorial investigation, which is a standard part of the liquidation process.

Can I Liquidate a Company with Debts Myself?

No, you cannot liquidate a company with debts yourself. The law requires the process to be conducted by a licensed insolvency practitioner (IP).

The IP is there to act fairly and impartially and ensure that the interests of all creditors are served. Valuations of any assets must be conducted by third parties with official accreditation, and the actions of directors themselves may come under investigation for charges of wrongful trading.

There are a few reasons why it is important to have a licensed IP handle the liquidation process:

• To ensure that the liquidation is conducted in a fair and impartial manner. The IP is a neutral third party who is not beholden to any of the creditors or shareholders. This helps to ensure that all parties are treated equitably.
• To protect the interests of creditors. The IP is responsible for maximizing the value of the company’s assets and distributing the proceeds to creditors in accordance with the law. This helps to ensure that creditors receive as much of their money back as possible.
• To protect the directors from personal liability. If the directors liquidate the company themselves, they may be held personally liable for the company’s debts if they are found to have mismanaged the company or acted in a fraudulent manner. The IP can help to protect the directors from this risk.

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 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.

They may also use the directors’ redundancy payments, sums of money offered by the government to all employees, including directors. Please note that directors’ redundancy payments are not always available, and even if they are, they may not be enough to cover the cost of the insolvency process. It is important to seek professional advice from a qualified insolvency practitioner to discuss your specific circumstances and options.

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.

What Happens When I Liquidate My Company?

If you are a director of a company that is liquidated, the following steps will typically be taken:

1. Official Receiver (OR) Takes Over – In compulsory liquidation, an official receiver will be appointed to liquidate the company. They may decide to hand over the role to an insolvency practitioner at a certain point.
2. Directors no longer have control over the company
3. Directors hand over the company’s assets, records and paperwork to OR or Insolvency Practitioner
4. Investigation into Directors Conduct – If acts of wrongful trading or director misconduct are identified, company directors could be made personally liable for company debts or be banned from acting as directors for up to 15 years. If serious fraud is uncovered, the directors could face a custodial sentence of up to seven years. However, in reality, this is quite rare, and in most cases, you will be free to set up another company and to begin trading once the liquidation is complete. 
5. Helping Insolvency Practitioner with Relevant Information – In general, directors powers cease at the point of the insolvency practitioners appointment, and the director’s chief responsibility thereafter will be providing the IP any relevant information and supporting them during the liquidation.
6. When the company is closed, your directorship will end, too. Directors are free to start again or seek employment.

What Are A Director’s Duties During Liquidation?

As well as acting in the best interests of the company creditors during the period of insolvency, directors are legally obliged to cooperate with the official receiver or insolvency practitioner during the liquidation process. If you fail to comply with the official receiver’s requests then allegations of misconduct could be made that may result in an Insolvency Service investigation and penalties may apply.  

Once an official receiver has been appointed to liquidate the company, they will send the directors a questionnaire to gather information about its assets and creditors. The directors will also be required to attend an interview where the reasons for the company’s insolvency and eventual liquidation will be discussed. At the interview, the official receiver will ask for:

• The completed questionnaire
• Company accounts, records and paperwork
• Full details of the company’s assets and liabilities
• Details of whether other parties are holding assets or trading records

You must answer the official receiver’s questions to the best of your ability. If you refuse to complete the questionnaire or attend the interview, the official receiver can forcibly seize records and request the court to compel you to do so. 

The official receiver may also request assistance from the directors in selling the company’s assets. If there is an overdrawn director’s loan account then that will have to be repaid and personal guarantees may be enforced if the company cannot afford to satisfy its debts.

What Happens if You Don’t Liquidate a Company?

If you don’t liquidate a company when it is insolvent (meaning it cannot pay its debts), you may be personally liable for the company’s debts. This is because directors have a duty to act in the best interests of the company’s creditors.

In addition, you may be disqualified from being a director for up to 15 years. This is because failing to liquidate an insolvent company is considered to be wrongful trading.

Here are some of the specific consequences of not liquidating an insolvent company:

• Creditors may take legal action against you. Creditors can sue you for the debts that the company owes them. If they are successful, you may be forced to sell your personal assets to repay the debts.
• You may be personally liable for the company’s debts. If the company’s assets are not enough to cover its debts, you may be personally liable for the remaining amount. This means that creditors can seize your personal assets to repay the debts.
• You may be disqualified from being a director. If you are found to have wrongfully traded the company, you may be disqualified from being a director for up to 15 years. This means that you will not be able to hold any director positions in any company.

Do You Want Advice About the Costs and Fees of Liquidation?

Call 08000 24 24 51, email info@businessexpert.co.uk 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.  

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