If you want to liquidate an insolvent company you need to use a process called Creditors Voluntary Liquidation (CVL). It will normally take between 6-8 weeks depending on the business.
- How to start the Company Liquidation process
- What does the Liquidator do?
- What happens to the company debts?
- Report on conduct of Directors
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How to start the Company Liquidation process
If you want to liquidate an insolvent company you need to use a formal process. Firstly the directors and shareholders agree a special resolution stating that the business is insolvent and should be closed.
They then instruct an Insolvency Practitioner (IP). The IP needs to generate a statement of the company’s affairs. They then call a creditors meeting (known as a section 98 meeting). A Liquidator is formally appointed at this meeting.
The Insolvency Practitioner instructed by the Directors will normally be appointed as the Liquidator. However if any creditors are charge or debenture holders they can appoint a different liquidator.
All creditors of the company must be contacted to give them notice of the section 98 meeting. The Insolvency Practitioner will also advertise the fact that the company is to be liquidated in the London Gazette. It also has to be published in the local newspaper where the company has its principle place of business.
What does the Liquidator do?
Once appointed the liquidator must ensure that the company does not incur any further costs. As such they will normally dismiss any remaining employees immediately. They will also terminate any ongoing contracts to supply the business.
A key responsibility of the Liquidator is to sell the company’s assets. These may include buildings, stock and equipment. However they could also include intangiable things such as client lists, the company websites and uncollected debts.
If a Pre Pack solution is being used a sale and purchase agreement may already have been agreed. If not the Liquidator will organise an independent valuer to value the assets.
What happens to the Company debts?
The money raised from the sale of assets is first used to pay the liquidator’s fees. After that any employees are paid statutory redundancy. If there are any remaining funds these are finally shared between the unsecured creditors.
Unsecured creditors are paid proportionally from any funds available. As such if they are owed 10% of the total outstanding debt they will receive 10% of the available funds.
If the company is insolvent it is likely the unsecured creditors will only be paid a small proportion of what they are owed. They then have no other option but to write off the unpaid debt.
Any equipment on lease or Hire Purchase will be returned to the supplier. Any outstanding debts owed to such suppliers then become unsecured.
Report on Conduct of Directors
As well as selling assets and closing the company the liquidator also produces a report on the conduct of the directors. This must be submitted to the Insolvency Service.
The report on director’s conduct is sometimes also referred to the D1 or D2 report. This is in reference to the number of the form that the liquidator must complete.
The Liquidator is obliged to report whether or not they feel the directors have managed the company correctly. They must indicate whether they feel the directors have allowed the company to continue to trade while insolvent.
If the Liquidator suspects misconduct they will submit their report using a D1 form. If they feel the directors have acted properly a D2 form will be used. A D1 report could trigger a further investigation of the director’s conduct by the insolvency service.