Liquidation: Everything Business Owners Need To Know

Understanding how liquidation works and when to close down

Liquidation of a company can be difficult to navigate as a business owner. We’ve put together a list of the most commonly asked questions about liquidation to help you understand how it works and whether it is right for your business.

1. What is liquidation?

Liquidation, also known as ‘winding up’ a company, is the process of bringing a business to an end. This means that the company will stop trading and employing people and assets will be used to pay off debts. The aim of the liquidation process is to sell assets to allow a dividend to be paid to each class of creditor. If there is any money leftover, this will go to shareholders.

Once the business is ‘struck off,’ the company name will remain on Companies House but its status will switch to 'Liquidation.’ The removal of the name only occurs on dissolution. This usually takes around three months after the closure of the liquidation, which can sometimes take over a year to complete.

There are three types of liquidation:
Creditors voluntary liquidation which happens when your company cannot pay its debts and you involve your creditors when you liquidate it.
Compulsory liquidation which occurs when your company cannot pay its debts and you apply to the courts to liquidate it.
Members’ voluntary liquidation occurs when your company can afford to pay its debts but you wish to close it.

2. Why would a company liquidate?

Insolvency tends to be the main reason that a company will choose to liquidate. Ultimately, this means that the business has reached a point where it cannot afford to make payments when they are due. Liquidation enables a company to convert assets into cash which can then be used to pay creditors.

When winding up a company, directors no longer have control of the company or anything it owns and cannot act for or on behalf of the company. Company directors must provide liquidators with any information about the company and hand over any company assets, records and paperwork. The director must not form, manage or promote any business with the same or similar names to the liquidated company. 

4. What happens when a company goes into liquidation?

When a company goes into liquidation, the business ceases to trade completely and employees are made redundant. Company assets will be sold to repay creditors and the business is then closed down. Directors no longer have control over the company and a Liquidator will review their behaviour.

Whether liquidating your company via a Members Voluntary Liquidation or a Creditors Voluntary Liquidation, you will require the advice of an Insolvency Practitioner. Only an Insolvency Practitioner, such as Beacon LLP, can be appointed as liquidator.

The Insolvency Practitioner will discuss the financial circumstances of the company with you and provide advice on all of the options available and the likely best solution to help you. You will then be guided through the process and what the next steps are.

6. How much will it cost to liquidate my company?

Although dependent on the size of the company, Beacon typically charges a fixed fee from £4,250 plus VAT and disbursements to place a company into Insolvent Liquidation. As a director, you must ensure that the fees required to carry out the liquidation process are paid.

Usually, fees are paid from company assets, such as cash at bank. If that is not possible other company assets may be sold to generate funds for the benefit of the company creditors and to cover the cost of liquidation.

If there are no assets remaining, as a director and an employee, you may be entitled to claim for Redundancy and Pay in Lieu of Notice. If you have worked for more than two years and taken a regular salary through PAYE, you could therefore have an entitlement which could be used to cover the cost of liquidation.

7. Will my credit rating be affected by my company liquidation?

The financial failure of a company should not affect your personal credit rating. However, you may find if you were to start a new company that suppliers and credit companies may carry out a search on you as director and be cautious in granting you credit if they can see that you have previously been involved with a company that has entered into liquidation.

As soon as the liquidation process begins, employees of the insolvent company are automatically dismissed. The liquidation process is classed to have ‘begun’ as soon as a liquidator is appointed. Staff are entitled to claim for statutory entitlements such as arrears of wages, holiday pay and redundancy pay. The company making the redundancies is usually liable for ensuring these entitlements are paid to dismissed staff. However, if the company is insolvent and cannot pay, payments will be made from the government's National Insurance Fund which is administered by the Redundancy Payments Service.

By the time a company ceases to trade and enters liquidation, there are normally arrears. Therefore, in most cases, there is little or no value in the lease and it is simply disclaimed by the Liquidator acting for the company. If however there is potential value in the lease, the Liquidator will appoint an agent to realise any value for the benefit of creditors, whilst liaising with the landlord.

If your company can afford to pay its debts, a Members Voluntary Liquidation might be right for you. If your company’s debts exceed its assets, a Creditors Voluntary Liquidation might be right for you.

Still are not sure whether liquidation is the right option for you?

Get in touch with one of our friendly Licensed Insolvency Practitioners? We offer a free and confidential initial consultation whereby we will provide you with advice for the best outcome on your situation.