What Happens when a Company goes into Liquidation

When a business begins Liquidation proceedings, the businesses assets are sold in order to repay it’s creditors. The business ceases to trade and it’s name is removed from the Companies House register. There are two main forms of liquidation processes – solvent and insolvent liquidation.

A solvent liquidation is called a Members Voluntary Liquidation (MVL). It typically the retirement of a director or this could be the chosen process to close the business due to it no longer serving a purpose.

An insolvent liquidation is when a business can no longer continue for financial reasons. The aim of an insolvent liquidation is to provide a dividend to all creditors, however in most cases the unsecured creditors receive very little – if any – return.

Lucas Johnson are licensed insolvency practitioners, with vast experience in all industries, and are available for appointment as liquidator for both solvent and insolvent companies.

Insolvent liquidation procedures

An insolvent liquidation means that the business is ceasing to trade as it cannot pay its bills as they are due (cash flow insolvency), or that the value of businesses assets are less than its liabilities (balance sheet insolvency).

There are two insolvent liquidation processes:

•            Creditors Voluntary Liquidation (CVL)

•            Compulsory Liquidation

Creditors’ Voluntary Liquidation (CVL)

This form of liquidation occurs when a company’s creditors are threatening to take legal action against the company and there is no realistic opportunity to recover or rescue the business. In these circumstances it is typically in the best interest of all involved to begin a Creditors’ Voluntary Liquidation.

This maximises the creditors potential of receiving a return as the companies’ assets will be sold during this process. The liquidators work on behalf of the creditors as a whole in order to realise the business assets rather than working on behalf of the business directors.

Brief timeline of a CVL

The process of a CVL is as follows; Shareholders will vote on or not whether to authorise a ‘winding-up resolution’ therefore placing the business into a voluntary liquidation. Following this, the winding-up resolution is then sent to Companies House within 15 days of the shareholder vote. A notice must be placed in the Gazette within 14 days. After this, 75% or more of the company’s creditors will vote on whether to accept the IP’s proposal, and the appointment of a liquidator. Following this, the businesses assets are realised, and the funds are distributed among the creditor groups, according to the statutory hierarchy of repayment. The conduct of directors in the lead up to the insolvency is then investigated for instances of wrongful and illegal trading.

Compulsory liquidation

When a business is placed into a voluntary liquidation proceedings, this is the Directors decision. However, in compulsory proceedings this was a decision made by a creditor who has force the company into this situation. If the winding-up order in then granted by the courts, a liquidator is appointed and the company assets will be liquidated to realise the dividends for any outstanding creditors.

Solvent liquidation – MVL

A MVL is a procedure that requires the input of a licensed IP and the closure of the company following distribution of its assets amongst creditors and shareholders. However, as this is a solvent liquidation process, the company creditors are repaid in full and the majority of directors are required to sign a Declaration of Solvency attesting to the fact that this will be possible. After no more than five weeks, the shareholders will pass the resolution required to wind-up the company, and appoint a licensed IP. Following this, a notice is placed in the Gazette within 14 days of this resolution being passed, and the signed Declaration of Solvency needs to be sent to Companies House within 15 days.

What does the liquidator do?

The appointed liquidator will realise companies assets and make the distributions to creditors. Although these are the main responsibilities, a liquidator will carry out other tasks, including: keeping creditors up to date during the liquidation process, managing outstanding contracts, interviewing directors for the required investigations and removing company from the Companies House register.

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