Liquidation is the process used to close down a limited company. The director might decide to liquidate if they no longer want to run the business or if it has to stop trading because it is insolvent and can’t pay its debts.
Included in the article:
- What is company liquidation?
- How do you liquidate an insolvent company?
- What happens to company debts?
- What happens to company assets?
- Can you start a new company?
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What is company liquidation?
If you decide to close your company, you will usually need to use the process called liquidation.
When a company is liquidated, it stops trading. All the business assets are sold and turned into cash. In addition, any outstanding invoices are collected.
The money generated is first used to pay all outstanding company creditors. Then, if there are any remaining funds, these are returned to the shareholders. The company is then dissolved.
There are two versions of liquidation that a director can implement. The one you use will depend on whether the company is solvent (able to pay all its debts) or insolvent (unable to pay all its debts).
If the company is solvent, a Member’s Voluntary Liquidation (MVL) is used. Where the business is insolvent, the process is called Creditors Voluntary Liquidation (CVL). The information in this article largely relates to the CVL process.
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How do you liquidate a insolvent company?
Once you have decided to Liquidate your company, you first have to appoint an Insolvency Practitioner (IP).
The IP will produce a statement of affairs for the company. This summaries all the financial details including all assets and outstanding debts.
The liquidator will then call a creditor’s meeting where the creditors vote to appoint the Liquidator. This will often be the IP who called the meeting. However, one or more creditors can decide to appoint their own liquidator if they wish.
Once appointed the Liquidator works for the creditors. Their job is to realise as much cash from the company as possible. They must sell as many assets as possible and take action to collect in any outstanding debts. This includes any money the director owes to the business such as an overdrawn director’s loan account (DLA).
The liquidator must also stop the company incurring further costs. This normally involves making any employees redundant and cancelling ongoing supply contracts.
Lastly, they submit a report about the conduce of the director’s of the company to the insolvency service. The liquidator can then close the company and it will be struck off the register at Companies House.
Employees made redundant after a company is liquidated may be able to claim redundancy pay from the Government’s Redundancy Payments Service.
What happens to company debts after liquidation?
If a company is insolvent, it does not have enough money to pay all its debts.
In these circumstances, after the business is liquidated, it is likely that the creditors will not be repaid. Where this is the case, they have to write off any outstanding balances they are owed.
In most cases, the director of the business is not personally liable for the company’s unpaid debts. The main time this is not the case is if they have given a personal guarantee (PG).
Directors of SME (smaller to medium) businesses will have commonly given a PG to pay debts such as the company overdraft, creditor card or loan if the business is liquidated. Where they don’t have sufficient personal funds to settle these debts, they may need to consider a personal debt solution such as an IVA.
A director may be liable to repay all or part of a bounce back loan (BBL) if it is found that they have used any of the cash on personal expenditures.
What happens to company assets?
Part of the liquidation process is the sale of the company’s assets. The liquidator will try to find a buyer for everything that the company owns which has any value.
Business assets can be physical such as vehicles or equipment. They can also be intangible such as a client data base or company website.
There is nothing to stop a Director of the business making an offer buy any of the assets from the liquidator. They will have to pay a fair market value.
The liquidator will arrange for the company assets to be valued by an external approved valuer.
A director most not take assets from a business before or during the liquidation process. This would be considered theft. The items would have to be returned or market value paid for them.
Can you start a new company?
You can be a director of a new company after your old business has been liquidated.
The only time this is not the case is if for some reason you are disqualified from being a director.
If you are planning to starting a company which will trade in place of the old one, you need to be careful. Under section 216 of the Insolvency Act 1986, a director must not start up a business with the same or similar name as one that has been liquidated.
The only time you can trade with the same name is if you purchase the right to do so from the liquidator and all the old creditors are informed.
Need help to liquidate your company? Call us (0800 180 8440) or complete the form below. The advice is free and confidential.