INSOLVENT LIQUIDATION

WHAT IS A LIQUIDATION?

Liquidation is the termination of a company or a limited liability partnership (“LLP”). The law was originally drafted to so that only companies could be liquidated. However it has since been amended to include LLP’s.

There are three types of liquidation in the UK:

  1. Creditors Voluntary Liquidation
  2. Compulsory Liquidation
  3. Members Voluntary Liquidation

1. CREDITORS VOLUNTARY LIQUIDATION

A Creditors Voluntary Liquidation (“CVL”) is started by the directors. The directors identify that the company is insolvent – that it cannot pay its debts as they fall due. The directors instruct an insolvency practitioner to take the legal steps required to wind up or liquidate the company.

2. COMPULSORY LIQUIDATION

A compulsory liquidation is the name of a liquidation that is made by Court Order.

It is started by a creditor who has not been paid – often HMRC. The creditor will get judgment for the debt owed (“CCJ”). Once they have the judgment the creditor can demand payment within a period of time. If the debt is not paid or settled the creditor can petition the court to wind up the company. If the court finds the company cannot pay its debts as they fall due (the unpaid CCJ acts as evidence of this) – then the Court will wind up the company.

A liquidator will be appointed (often the Official Receiver).

This is a common tool for debt collecting.

THE LIQUIDATOR’S JOB

Once the liquidator is appointed the control of the company passes to the liquidator. The liquidator acts as the board of directors. His job is to sell the company assets and distribute the funds realised to creditors (after a fee).

The liquidator’s other function is to submit a report on the directors conduct to the DTI. The DTI use this report as the basis for their decision to take action against the directors where it is in the public interest.

It is a very common, quick and easy way to close a business properly.

CAN DIRECTORS OR SHAREHOLDERS BUY BACK THE ASSETS OF THE COMPANY?

Yes. However the liquidator has a duty to the creditors to ensure he gets the best price for them. The liquidator will therefore only sell the assets to the directors at market value. The liquidator will normally appoint an independent valuer to determine what the value is.

THE DIRECTOR’S JOB

The director’s role and powers stop when the liquidator is appointed. Their only duty is to assist the liquidator where required.

STARTING ANOTHER COMPANY WITH THE SAME NAME

These are called Phoenix Companies. It is possible to start a company with the same name but advice needs to be taken before doing so because if the correct procedures are not followed the shareholders of the new company can be held personally liable for the new company’s debts if that too becomes insolvent.

BEING THE DIRECTOR OF OTHER COMPANIES

Directors of liquidated companies can be directors of other companies, as long as they haven’t been made bankrupt or been disqualified from doing so in the courts.

3. MEMBERS VOLUNTARY LIQUIDATION

A members voluntary liquidation (“MVL”) is materially different to a CVL and compulsory liquidation in one key way. The company is solvent.

An MVL is a formal method in which solvent companies are wound up or liquidated. The assets of the company are realised and the money is paid out to shareholders. Under an MVL the assets of the company can be paid out to shareholders too if the shareholders prefer.

It is used to responsibly formalise the end of a successful company. See Solvent Liquidation for further details.

THE LIQUIDATOR’S JOB

The liquidator’s job is to realise the assets and pay them to the shareholders after paying in full any remaining company creditors.

FREQUENTLY ASKED QUESTIONS – LIQUIDATION

What is a liquidation?

Liquidation is a process where control of a company is passed to an insolvency practitioner (IP). The IP then acts as liquidator. His job is to sell all the company’s assets and distribute the money to the company’s creditors.

When is liquidation appropriate?

When the company is insolvent (can’t pay its debts on time) and there is no hope of turning the position around. If the company can be turned around and the directors have the stomach for the fight, other “turnaround” procedures may be better, such as an administration or CVA.

Will liquidation stop the Creditors calling?

No. But once a company is in liquidation the calls are directed to the liquidator and his staff. It is their job to tell the creditors what (if anything) they will get paid.

Who pays the liquidator?

The liquidator is paid from the company’s assets. Whatever is left after the liquidator has been paid, is then paid out to creditors. Often there is not enough left over to pay the creditors anything. If there are no assets in the company the liquidator will need to be paid separately by the directors or shareholders of the company.

Can I be a Director of another company after liquidation?

Yes.

Can I start another company using the same name?

Yes, however you need to take steps before doing so. If you don’t take these steps you may be open to criminal action.

I owe the Tax Man a fortune – what can they do?

In many ways HMRC are just like any other creditor. They will be dealt with by the liquidator and receive dividends from the liquidator (where funds allow). In other ways however HMRC are not like ordinary creditors because they have a great knowledge of the law and they have the money to chase directors that they deem have acted incorrectly.

Under the Wrongful Trading provisions of the Insolvency Act directors may be made personally liable for some debts of the company.

The crucial question is whether the directors took on credit knowing full well that they could not pay it back. Take HMRC – did the directors take VAT and PAYE/NIC deductions that they knew they could not afford to pay over? If they did then there may well be a legal action against the directors.

However – because there is a possible legal action, it does not necessarily mean that this action will be taken. This is a complex area. If you think you may fall foul of this area of the law please call us directly for further advice.

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