08000 24 24 51

Liquidating a Company

In this article, we’ll explore more about the process and implications of liquidation, as it pertains to limited companies in the UK.

Liquidating a Company

From identifying if this is the right course of action, to a break down of the process itself, including the responsibilities of directors.

Speak with the Business Debt Experts Now

  • If you submit this form you’ll get a prompt response from someone who can offer advice.
  • AABRS are expert debt & business rescue specialists based in North London.
  • Our recommendation is based on reviews, history, trading standards, ratings, satisfaction, trust & price. 
  • They offer over 100 years of combined partner experience.
  • They are fully licensed & regulated.
  • Your data will never be shared or misused.
  • Here at Business Expert we take your privacy seriously. Your personal data will never be used for external marketing purposes. By completing this form you agree to being contacted and our privacy policy.

What is Meant by Liquidation of Company?

Liquidation means that a company, typically one experiencing financial difficulties, is brought to an end, which means it will cease trading, will no longer employ people, and the company’s assets will be liquidated to repay creditors.

Once the company is struck off the companies register at Companies House, it will cease to exist.

Corporate insolvency is established by a licensed insolvency practitioner using two established tests – the cash flow test and the balance sheet test.

Of course, solvent liquidation – whereby the directors of a limited company hire an insolvency practitioner to ‘liquidate’ their assets, is also the correct use of the term.

Should I Liquidate?

There are 2 classic tests to ascertain if a company is insolvent.

If either of these tests prove correct, you’ll need to speak with an insolvency practitioner to understand more about your situation.

While liquidation is one course of action to repay creditors, there are others too which may not require the closure of the limited company.

The cash flow test examines whether the company can pay its liabilities as and when they fall due. Here, the insolvency practitioner will take a look at the company’s current financial obligations and any that will be due in the short term. If the company is unable to meet the daily costs of running the company, it is essentially insolvent, and directors must act quickly and seek professional advice on how to rescue their company before it is too late.

In contrast, the balance sheet test aims to clarify whether the company has more assets or liabilities. The test takes a closer look at the company’s assets, including stock, debtor book, cash and property vehicles and machinery. These assets are placed against any company debts, such as bank loans or other finance providers, HMRC, employees, suppliers, among others to establish whether the company is solvent.

How to Liquidate Your Company

The usual process is that a director, facing increasing creditor pressure, makes contact with an insolvency practitioner to consider his/her options. Once the IP (insolvency practitioner) is appointed, the company ceases trading, and the directors powers cease.

At this point, it is the IP’s responsibilities include:

  • Make a full assessment of the company situation, including an overview of assets and liabilities.
  • Deal with creditors, and explain the process which is occurring
  • Convert what company assets there are into cash and pay creditors in order of priority
  • Strike the Limited Company off the Register at Companies House.

For directors, their active role in the company comes to a complete end at the point of IP appointment.

Can I Liquidate a Company with Debts Myself?

While many directors wonder if they can save on costs by conducting a liquidation themselves, 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 creditors interests 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.

Liquidating a Company for Free

Although you can’t liquidate for free, the insolvency process is paid for by the sale of company assets.

All assets will be liquidated, i.e. sold, by the licensed insolvency practitioner and paid to creditors in order of priority.

The liquidators own fees are also taken from the realised assets.

Where there are no company assets, it is often possible to find a source of funds from directors redundancy payments. These are offered by the government to all employees, including directors, and can often be significant.

Fill in the form above if you are interested in having us ascertain whether you qualify for directors redundancy.

Types of Liquidation

By contacting a licensed insolvency practitioner, company directors will be informed of the options that are available to them. These may range from invoice factoring to proposing a voluntary liquidation.

There are three main types of liquidation:

A director can propose that the company stops trading and be liquidated if it is struggling to pay its debts and the majority of shareholders are in agreement.

Creditors’ Voluntary Liquidation (CVL)

A director can propose that the company stops trading and be liquidated if it is struggling to pay its debts and the majority of shareholders are in agreement.

Compulsory Liquidation

The beleaguered company can’t pay its debts and a creditor, for instance, HMRC applies to the courts via a winding up petition to liquidate it as a last resort to get paid.T

Members Voluntary Liquidation

Another form of liquidation is a members’ voluntary liquidation. However, this option is only available to companies that are solvent or in other words are able to pay their debts, but directors still want to voluntarily liquidate the company or close it and move on to pastures new.

Voluntary Liquidation Offers Certain Advantages

Although liquidation may not appear to be a step forward, when company directors are under constant pressure from irate creditors and have been threatened with legal action by HMRC, voluntary liquidation offers a number of benefits compared with compulsory liquidation by the tax authority or an unsecured creditor. For instance, they will  have control over the outcome, they will avoid legal action and the possibility of personal liability for company debts due to wrongful trading is also minimised.

Post Liquidation

After the company has been closed, the liquidator is required to investigate the actions taken by the company’s directors while the company was trading solvent. If he or she is able to demonstrate that the directors failed to act in the best interests of creditors, they may be accused of ‘wrongful trading’. Any director found guilty of this could be banned from being a director for up to 15 years after the liquidation of the company.

Once the company has been liquidated, creditors repaid and debts settled as far as possible, any remaining debts are written off. If no signs of ‘wrongful trading’ have emerged, directors are free to move on to another company or into employment.