What is Liquidation?
Liquidation is the process by which insolvent companies are closed down and debts repaid to creditors out of the available assets. This happens when there is no prospect of rescuing the company. Depending on the type of liquidation, the process is overseen by either a licensed insolvency practitioner (acting as a liquidator) or by the Official Receiver.
A company is insolvent if it cannot pay its debts when they are due, or if its liabilities outweigh its assets.
Liquidations can be standalone, or they may follow other insolvency procedures. For example, an insolvent company may enter administration and have its business and assets sold to a new company. Once the sale is completed, the old company may then be placed into liquidation so that the proceeds of the sale can be distributed to all creditors, further investigations can be undertaken and the company can be properly wound-up.
There are different types of liquidation:
- A Creditors' Voluntary Liquidation (CVL) is initiated by the directors of an insolvent company via a company resolution. CVLs are overseen by insolvency practitioners, whose appointment is ratified by creditors.
- A Compulsory Liquidation is initiated by the court following a petition for winding-up (this petition can be made by creditors or company directors). Compulsory liquidations are handled by the Official Receiver in the first instance, but creditors may request that insolvency practitioner takes over (the Official Receiver may also choose to pass the case to an insolvency practitioner where they consider the specialist skills of an insolvency practitioner are required). Sometimes, the Official Receiver may be supported by an insolvency practitioner acting as a 'Special Manager'.
- A Members' Voluntary Liquidation (MVL) is initiated by the directors of a solvent company. This process can be used where creditors will be paid in full. Directors may wish to use an MVL to close their company as a means of demonstrating that all of the company's loose ends have been tied up. Alternatively, a director may dissolve their company, but this process will not be overseen by an insolvency practitioner.
Liquidation has a number of unique features which mean it is more useful for closing companies down rather than rescuing them. In liquidation, the liquidator can 'disclaim' onerous assets: this means they can bring some contracts, to which the insolvent company is party, to an early end as they aren't needed anymore. It is easier to pay dividends to all creditor groups in liquidation than it is in an administration. It is not uncommon for contracts to be automatically brought to an end when a company enters liquidation: this would make it difficult for a company to continue to trade as normal in liquidation.
Who oversees a liquidation?
Compulsory Liquidations can be overseen by the Official Receiver or a licensed insolvency practitioner. CVLs and MVLs are overseen by a licensed insolvency practitioner.
The liquidator will take over the duties and responsibilities previously held by the insolvent company's directors. Liquidators are responsible to all creditors: they are not responsible to one particular creditor, and they are not responsible to the insolvent company's directors. The liquidator's duty is to achieve the best possible outcome for the body of creditors as a whole.
A liquidator's work is overseen by the court, creditors, and their regulator. You can find out more about how insolvency practitioners are regulated here.
What does a liquidator do?
Whatever the type of liquidation (compulsory or voluntary), once appointed, the liquidator works quickly to get as accurate a picture as possible about the company's affairs and financial position: its bank accounts, its operations, its assets and liabilities. The liquidator will have to secure the company's assets and make decisions about what happens to the company's staff, pensions, and contracts.
Depending on the case, staff may be kept on and services may continue to be provided. In some cases, this will not happen and the liquidator will consult staff on redundancy and find a way to transfer the provision of services to another provider if a sale of the business can be achieved.
It is the role of the liquidator to raise money to repay the company's creditors. This can be done by selling the company's business and assets. The business could be sold as a whole or individual assets could be sold off. Assets can include property, equipment, the company's brand, its ongoing contracts (if these can be sold or transferred), and any other asset (tangible or intangible) of value.
The liquidator must ensure that a fair distribution of the company's assets takes place among creditor groups. The overriding aspect as far as the liquidator is concerned is acting in the best interests of creditors to maximise their returns.
Where repayments are made to creditors out of the company's assets, this is done according to a strict hierarchy set out by government. You can find details of this hierarchy here. The amount of money repaid to creditors depends on the value of the insolvent company's business and assets.
The liquidator will also pursue money owed to the insolvent company so that they can return this to creditors, too. This can include litigation and investigating whether any fraud has taken place.
The liquidator also has an important role to play in investigating the conduct of the company's directors prior to the insolvency. They will make a report to the Insolvency Service who may later begin disqualification proceedings against the directors.
Where the liquidator is an insolvency practitioner, they will be required to provide regular updates to creditors. These can be found at Companies House. Where the Official Receiver is acting as liquidator they are not under the same duty to report to creditors during the insolvency process.
There is no set timescale for liquidation: the realisation or pursuit of assets can take weeks, months or years. It depends on the complexity of the case.
What happens at the end of a liquidation?
Three months after the final liquidator's report, a liquidated company will be dissolved and will cease to exist.
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