Liquidation is the way to formally close a Limited Company. If the company is insolvent the process is called formally known as a creditor’s voluntary liquidation (CVL).
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- When to use Liquidation?
- How to implement Liquidation
- How are Directors and Employees affected?
- What does Liquidation cost?
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When to use Liquidation
A company that is insolvent and unable to pay its debts can be closed using Creditor’s Voluntary Liquidation (CVL). The business may be struggling because of changes in the market such as fewer customers or greater competition. Alternatively it may have simply fallen victim to mismanagement.
The directors will normally have already considered alternative rescue options such as additional investment or a Company Voluntary Arrangement (CVA). However these are not always viable. As such they may have no other option than to liquidate to protect their own position.
Liquidation can also be used to close a company that is not insolvent. In these circumstances it is called an MVL (Members Voluntary Liquidation). It is used if shareholders no longer want a company which has sufficient assets to pay its debts.
How to implement Creditor’s Voluntary Liquidation
If you have decided to liquidate your company you will first need to appoint an Insolvency Practitioner (IP). The IP will hold a creditors meeting so that a Liquidator can be formally appointed. The IP chosen by the directors will normally become the Liquidator unless any of the creditors object.
The Liquidator then has the task of selling the company assets and collecting in any debt owed. The money realised is used to repay the outstanding creditors. However it is unlikely that unsecured creditors receive what they are owed in full. They will have to write off any debt they are not repaid. Any remaining employees will be made redundant.
The Liquidator will also make a report on the conduct of the directors of the business. This details whether or not in the liquidator’s opinion the directors have acted properly. If not a recommendation will be made that further investigation is required. The report is submitted to the Insolvency Service.
How are Directors and Employees affected by Liquidation?
After a company is Liquidated the Directors are free to take up directorships with other companies. The liquidator will write a report on their conduct which is sent to the Insolvency Service. If the Insolvency Service believe that the Directors have been involved in mis conduct they could be disqualified. However this is rare.
If any director owes money to the company in the form of an outstanding loan account this will have to be repaid. The Liquidator will collect in these debts. Court action can be taken against the relevant director to enforce payment if necessary.
Normally the directors will not have any personal responsibility for repaying debts owed by the company. However if a director has given a personal guarantee then they will become liable for the debt they have guaranteed. They will then have to pay the outstanding balance in full.
Liquidation involves the closure of the company. As such once a liquidator is appointed all the employees will be made redundant. There may not be enough funds to pay redundancy packages. Where this is the case employees will be treated as preferential creditors and receive a payment of up to £800 from the funds available.
The liquidator may be able to sell a part of the company as a going concern. In these circumstances under TUPE rules any employees engaged in this area of the business must be transferred. They will transfer to the new company under the same terms and conditions of employment.
What does Liquidation Cost
The cost of a CVL largely depends on the size and complexity of the company and the work involved. The cost is based around the free charged by the Liquidator. Generally speaking the fee will start in the region of £3000 + VAT and go upwards from there.
The fees are normally paid from the proceeds of the sale of the company’s assets and the collection of any debts owed. The liquidator is paid preferentially over any of the unsecured creditors.
The company may be small and have no assets or outstanding debt for collection. In these circumstances the cost of the liquidation will have to be funded by the directors personally.