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15/01/2018

A Quick Guide to Liquidation

What is liquidation?

If a company cannot pay its debts when due or if its liabilities exceed its assets (i.e. the company is insolvent), it will enter an insolvency procedure most likely to maximise returns to the company’s creditors. An office holder will be appointed to oversee the procedure and is responsible for maximising creditor returns.

There are four main corporate insolvency procedures:

Administration – Primarily designed to rescue a business or company. The office holder (an administrator) will run a company and its business while looking for a buyer or new investment, or while a restructuring takes place. The company may be rescued completely with new investment or a restructure, or parts of the business may be sold in full or in part to a new company and the insolvent company liquidated.

Company Voluntary Arrangement – Where an insolvent company agrees to repay its creditors a proportion of its debts over a set period of time. In most cases trade will continue with payments to creditors being made from trading receipts. An insolvency practitioner supervises the arrangement and the directors remain in charge.

Creditors’ Voluntary Liquidation (CVL) – Companies are liquidated when there is no prospect of rescue. The directors will seek to appoint an insolvency practitioner to act as liquidator of the company and to supervise the winding up of the company’s affairs. The company’s assets are sold to raise money to repay creditors.

Compulsory Liquidation – As above, but the company is placed into liquidation by the court. This can be on the petition of the company’s creditors or directors. The Official Receiver is automatically appointed liquidator, although the creditors have the opportunity to appoint an insolvency practitioner of their choice to act as liquidator in place of the Official Receiver.

In any liquidation the liquidator’s primary duty is to maximise the returns to the company’s creditors. 

Who is an office holder?

In administrations and liquidations there is an office holder appointed. 

The office holder is an officer of the court. They are responsible to all creditors. 

The office holder can be an insolvency practitioner (licensed by a recognised professional body) or, in the case of a compulsory liquidation, the Official Receiver (a government office). 

The office holder takes on the roles and duties of the directors, including responsibility for the company. 

In the Carillion case, the company has been placed into compulsory liquidation and the office holder (liquidator) is the Official Receiver. The OR is being supported by a team of insolvency practitioners at PwC (acting as special managers). 

What does a liquidator do?

Whatever the type of liquidation (compulsory or CVL), 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. The liquidator will have to secure the company’s assets and make decisions about what happens to the company’s staff, pensions, and contracts etc. 

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. 

The company’s pension fund may be transferred to the Pension Protection Fund with the approval of the Pensions Regulator. 

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. 

The liquidator will also pursue money owed to the insolvent company so that they can return this to creditors, too. This can include litigation. 

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. 

In a CVL, the liquidator will be required to provide regular updates to creditors. These can be found at Companies House. It should be noted that when the Official Receiver is acting as liquidator they are not under the same duty to report to creditors. 

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. 

Fees

In an insolvency procedure handled by an insolvency practitioner, fees are approved by the creditors. In a case handled by the Official Receiver, fees are charged at a statutory rate. 

What are the different classes of creditor? 

In an insolvency, it is usually the case that there is not enough money left in a company’s or individual’s possession for all creditors to be repaid all that they are owed. 

Because of this, the government has created an ‘order of priority’ that determines the order in which creditors are paid back their money (assuming there are funds available). 

This order prioritises major lenders with security, often banks. These types of lenders are further up the order of priority so that they feel confident continuing to lend to businesses. If there was very little chance that a bank would receive its money back in the event of one of its debtors becoming insolvent, the bank could become unwilling to lend to other businesses in the future. 

In order, the classes of creditor in an insolvency are:

  1. Secured/fixed charge creditors, usually banks, whose lending is tied to a specific property or asset belonging to the company or individual (e.g. a mortgage).
  2. The costs of the insolvency, such as legal fees or rent on a commercial property, or any professional fees incurred.
  3. Preferential creditors, usually the employees of an insolvent company who are owed unpaid wages, holiday pay, and/or pension contributions.
  4. Floating charge creditors, whose lending is tied to a general type of asset rather than a specific asset – for example, a lender could issue a floating charge for the goods in a company’s warehouse, whose quantity and value can vary over time.
  5. Unsecured creditors, who are usually the largest group by number, if not by size of the debts owed to them; trade suppliers, employees owed redundancy pay, customers who possess gift cards, and HM Revenue & Customs are common types of unsecured creditors.
  6. Shareholders and bond holders. 

Those lower down the priority list are less likely to see their money back.

If there is a floating charge holder, the liquidator may hold back a proportion of the funds owed to this group to ensure unsecured creditors do receive some money back. This is called the ‘prescribed part’ and is capped at £600,000.

Notes to editors:

  • R3 is the trade body for Insolvency Professionals and represents the UK’s Insolvency Practitioners.

  • R3 comments on a wide variety of personal and corporate insolvency issues. Contact the press office, or see www.r3.org.uk for further information.

  • R3 promotes best practice for professionals working with financially troubled individuals and businesses; all R3 members are regulated by recognised professional bodies
     
  • R3 stands for 'Rescue, Recovery, and Renewal' and is also known as the Association of Business Recovery Professionals.