Complete Guide to liquidations

This guide explores the difference between solvent (“mvl”) and insolvent liquidations, of which there are two types: creditors voluntary liquidation (“cvl”) and compulsory liquidation (“compulsory winding up”).

Chamberlain & Co have been established for over 20 years and liquidations in all their forms have been core service lines throughout. We work with all stakeholders to optimise the outcome, whether it is a simple company closure or part of a rescue process. We are regularly recognised in the Turnaround, Recovery and Insolvency annual awards for work that we do and the contribution that we make.

There are several methods which can be used to close down your company. Choosing the right pathway largely depends on whether the company is solvent or not, in addition to the aims and objectives of the directors. This guide seeks to assist you in choosing the best course of action to close down your company, regardless on whether or not your company is facing financial distress.

Solvent versus Insolvent Liquidations

The two tests of a company’s solvency / insolvency are:

Can it pay its liabilities as they fall due? (Known as the liquidity test).
Do its assets exceed its liabilities? (Known as the balance sheet test).

If a company can pass both the above tests a solvent liquidation is appropriate, if it fails either then an insolvent liquidation may be appropriate.

Liquidating a solvent company

There are several reasons why you may wish to liquidate a company which is solvent, including retirement. There are 2 options in these circumstances:

Implementing a Members Voluntary Liquidation (“MVL”)
Applying to be struck off the Register at Companies House.

Liquidating an insolvent company

When a company is insolvent, there are 2 avenues which can be used:

Compulsory Liquidations

A creditor, director or shareholder can submit a petition to wind up a company. In order to submit a petition, there are certain criteria which must be met-

you can show that the company owes you more than £750, or
a majority of shareholders agree that winding up the company is the best way forward, or
it can be demonstrated to the court that it is just and equitable to wind the company up

If you meet one of these criteria, a petition to wind the company can be granted. This needs to contain all the relevant information and must be sent to the correct places. After the petition has been issued, the company must be notified and the notification of the hearing must be advertised in the London Gazette.

If the court grants the winding up of the company, the Official Receiver will be put in charge of the liquidation process. As with any other liquidation, the assets will then be realised and any available funds will be distributed to creditors.

Compulsory liquidation by Shareholders

As well as a petition arising from creditors, shareholders can also petition to wind up a company on the basis that it is just and equitable to do so. This is often the case where there is a deadlock between shareholders who own 50% of the shares each. This is because to place a company into a CVL, a special resolution is required which in order to be passed needs the agreement of at least 75% of shareholders. Therefore, when the situation of 2 shareholders owning 50% each arises, who disagree on the best course of action to take, gaining this special resolution is problematic. When this is the case, a compulsory liquidation may be the only method of forcing the issue to be resolved by allowing the court to decide what needs to be done.

In addition to this, it can often be the case where a substantial company with a large amount of assets, which would normally be dealt with through using a MVL, cannot agree on who and how they want to do it. Therefore in these instances, a court procedure will have to be used in order to implement the liquidation by taking away the shareholder’s control.

The Official Receiver (“OR”)

After the petition has been passed and the company enters into liquidation, the Official Receiver becomes the liquidator automatically. However, directors and creditors can still seek to appoint an Insolvency Practitioner to become liquidator. This is often the case in complex situations.

The liquidator will then realise the assets and distribute any available funds. However, with a compulsory liquidation, the Official Receiver will retain the investigation into the conduct of the directors and the company and whether or not in his view the directors are fit to continue to act as directors or if they should be subject to director disqualification proceedings.

Even though this may seem very daunting for directors, there are options available to stop the compulsory liquidation taking place. Therefore, if you are worried about anything you have read in the above section, get in contact today for a chat!

Voluntary Liquidations

Why choose a voluntary liquidation?

There are many benefits for both directors and creditors of using a CVL.

By opting for a voluntary liquidation, as opposed to being forced into a compulsory liquidation, directors control the initiation of the process. They are able to choose who they initially wish to instruct and the shareholders appoint as liquidator although this choice needs to be ratified by the creditors, which usually happens.

The process also does not have to go through the court so it can be a much more streamlined and quicker process. This is beneficial as any employee arrears can be quickly claimed from the government and the affairs of the company quickly taken into the control of the liquidator.

Furthermore, when a voluntary liquidation is used, the director is often seen as taking ownership of any problems which have arisen and therefore taking control of the situation by appointing an appropriate professional to sort it out. Whereas a compulsory liquidation can be seen as a director not taking ownership and therefore it being necessary for a creditor to force the company into liquidation in order to get the money which is owed. Therefore, a director’s reputation can be protected better by implementing a CVL.

There are also often less initial costs for getting a company into a CVL. This is because of the lack of court hearings and complexity of first involving the Official Receiver into the liquidation- therefore leaving more funds available to distribute to creditors.

CVL’s are often a more efficient and cost-effective method. This is because the Insolvency Practitioner is often specialised in conducting these types of liquidations and therefore are able to implement and see the process through in a more efficient manner.

The main differences of the liquidation processes

The post appointment procedures for compulsory and voluntary liquidations are largely the same, with the Insolvency Practitioner collecting the assets and making any available dividends out to creditors.

Investigation into the directors’ conduct

One difference in a CVL is that the liquidator will carry out the investigation into the conduct of the directors and within a compulsory this will be done by the Official Receiver. The liquidator is able to make reports to the Official Receiver on any of his findings but the main investigation is conducted by the OR.

The main differences of the different types of liquidations are summarised as follows:

Compulsory

The liquidation process is initiated by a petition to court. This is usually done by a creditor of the company but can also be conducted by shareholders and directors. The court will then grant the winding up order if it considers it to be appropriate.
When the court decides that the company must be liquidated, the Official Receiver automatically becomes the appointed liquidator immediately.
An insolvency practitioner can then be appointed instead as liquidator and will carry out all the necessary steps to realise assets and distribute dividends to creditors.
The Official Receiver will then conduct the investigation into the directors conduct, with the liquidator feeding back any information which may assist.
The liquidation process is then carried out as it would be within a CVL, with the liquidator realising assets and distributing any available funds to creditors. However, during a compulsory liquidation these dividends can to be lower than they would be if a CVL was conducted due to the additional legal, court and Official Receiver’s charges.

Voluntary

In a voluntary liquidation, the directors are able to have an input as to which liquidator is appointed to carry out the process. However, this will need to be ratified by the creditors.
After all necessary meetings of directors, shareholders and creditors have been held, the nominated Insolvency Practitioner is then officially appointed and will gain all necessary powers to liquidate the company.
The appointed Insolvency Practitioner will conduct the investigation into the directors conduct to ensure no wrongful trading or any other breach of their duties has been carried out.
The assets will then be realised in a way which will maximise the funds available for creditors. After all assets and costs have been taken care of, the creditors will receive any available funds.

Director’s responsibilities during liquidation

During all types of liquidation processes, the role and the responsibilities of the directors are broadly the same.

Once the company goes into liquidation, all directors’ powers cease. They are no longer able to run the company or make any decisions and these responsibilities are handed over to the liquidator. This is the case for any type of liquidation, whether compulsory or voluntary.

However, even though all responsibilities are handed over, directors have a duty to co-operate with any appointed liquidator or Official Receiver. They must assist the liquidator, where necessary, to realise any assets, provide all essential books and records if requested and provide any information regarding the company affairs.

Comparison of the liquidation’s time span

A compulsory liquidation is usually slower to process. This is because it involves the issue of petition, followed by a court procedure. The case will then be heard in court after at least 28 days of the petition being presented and then the process is handed over to the official receiver. It can then take up to 12 weeks to appoint an Insolvency Practitioner and within this time very little work may be carried out in the liquidation.

Whereas within a CVL, an Insolvency Practitioner can be instructed and the company can be placed into liquidation within a couple of weeks.

With a CVL, the Insolvency Practitioner who is appointed will be able to deal with the assets promptly. The quickest possible time to get into a CVL is approximately 8 days from instruction, which shows it is much faster to get the process officially started. This time period includes time to convene at short notice with the requirement of 3 clear business days’ notice for the initial creditors meeting. However, on average it would normally take around 2 weeks to get the company into liquidation from instruction, still a much quicker time than when a compulsory liquidation is used.

Liquidation FAQ’s

What are the costs of liquidation?

The costs initiating a compulsory liquidation can be lower than those for cvl.

These are summarised as:

initial court fee of £280
Petition deposit of £1,600
The costs associated with the advertisement in the London Gazette, which is a legal obligation.
Solicitors costs for preparing and issuing the petition may be £1,000 or more.

These fees must be paid by the individual who is petitioning to liquidate the company.

Once the winding up order has been granted the Official Receiver’s costs of approximately £9,000 are levied.

Who pays for the liquidation?

When the company is in liquidation, the costs accumulated throughout the process are usually paid through the realisation of the assets and therefore by the company itself.

To find out more about the costs and fees of liquidation, contact us today for a chat.

What will happen to my employees during liquidation?

The speed of the process has an impact on the company’s employees. Their claims, for arrears of wages and pay in lieu, will not be able to be processed until the company has entered into a formal liquidation process. Therefore, by delaying the start of the process through a compulsory liquidation, there will also be a delay in which the employees can raise their claims.

Can someone apply for a compulsory liquidation if the company has already been dissolved?

Yes! In order to do this, the applicant must apply to restore the company and then petition against it. This can be a very lengthy and costly process, but it can be done.

An advantage of using a formal liquidation process over a dissolution is that a creditor is potentially able to get the company restored for up to 20 years to reclaim the funds they are owed. Whereas in a formal liquidation any claims have to be made within the timescales set out otherwise the claim is lost.

When the company is put into a MVL and the notice for claims is advertised, all creditors lose the opportunity to pursue their claim if they do not respond to the advert within 28 days. Therefore it is safer from a shareholder point of view, that they have had that process for the settlement of claims and then no one can claim against any distribution made to the shareholders in the future.

For more info see the guide on dissolutions/strike offs.

What happens to the director after the liquidation has finished?

After the company has been placed into liquidation, a director may continue with life as normal. They are able to act as a director of a new company if they wish, subject to no disqualification proceedings subsequently arising.

What will happen to the company bank accounts?

After the advertisement of the winding up petition in the London Gazette, the bank accounts of the company are usually frozen by the bank. If the account is in funds, these will be dealt with by the liquidator. If the accounts are overdrawn, the bank will be able to make a claim as a creditor in the liquidation.

Will going into liquidation impact the director’s credit ratings?

No, going into liquidation will not affect the personal credit rating of directors. This is regardless of the type of liquidation which has taken place.

Am I able to repay myself any debts which the company owes me as a director?

No, you must not repay yourself or any friends or family any money which the company owes. By doing so, you may find yourself personally liable and become responsible for paying the funds back.

What is the potential perception of directors in compulsory liquidation?

Allowing a compulsory liquidation to occur can suggest that the directors were unaware, ignoring or not taking ownership of the company’s financial affairs.

Liquidating a company voluntarily may be the best course of action. It shows that the directors are taking responsibility for the company’s situation and bringing it to a conclusion. The process is quicker, which provides many benefits for creditors, employees and directors.

Liquidation Guide Summary

We hope that the guide has helped explain the different types of liquidation, however this option needs to be considered alongside the other formal insolvency and informal options such as a Moratorium, Administration, Company Voluntary Arrangement (“CVA”), Strike off/dissolution or accelerated sale/merger.

We would be happy to talk you through these possibilities for your circumstances, email or call to have a free, no obligation consultation.

Give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk.