The li­quid­at­or: com­pet­en­cies and re­spons­ib­il­it­ies

If the beloved family business is suddenly up to its neck in debt, it can be extremely frus­trat­ing. But the sobering truth is that not every project we care about has a bright future ahead of it. If no in­solv­ency pro­ceed­ings are possible, the last option is often the ter­min­a­tion of the company and the li­quid­a­tion of all remaining assets. The process is not automatic, but is taken over by a so-called “li­quid­at­or,” who is familiar with the li­quid­a­tion of companies and part­ner­ships. But what exactly does a li­quid­at­or do?

The li­quid­at­or is the person (natural or legal) who is entrusted with the task of winding up a limited liability company (LLC), or another type of company or part­ner­ship – i.e. to carry out the li­quid­a­tion. Li­quid­at­ing a business involves ending the current business, col­lect­ing claims, con­vert­ing all existing assets of the company into cash (i.e. making them liquid), and then ter­min­at­ing them com­pletely.

The li­quid­at­or in­de­pend­ently takes care of all li­quid­a­tion measures, while strictly complying with the ap­plic­able law for the type of company he is dealing with and the laws governing the dis­tri­bu­tion of the company’s assets. In this process, the li­quid­at­or works on behalf of the company that is being closed – this also implies to judicial and ex­traju­di­cial rep­res­ent­a­tion of the company.

Li­quid­at­ors can be ac­count­ants, lawyers, or business ex­ec­ut­ives, depending on the case and legal re­quire­ments. Generally speaking, they are assigned by the court, by unsecured creditors, or by the company’s share­hold­ers and have a fiduciary and legal re­spons­ib­il­ity to all involved parties, including the company being li­quid­ated, the court, and any creditors. Until the assets of the company are sold and debts are paid off, the li­quid­at­or must make sure the li­quid­a­tion process runs smoothly from start to finish. In the UK, the main types of in­solv­ency pro­ceed­ings that include a li­quid­at­or are the following:

• Voluntary li­quid­a­tion: This self-imposed dis­sol­u­tion of a company is one that is approved by share­hold­ers and the board of directors when they decide that the company no longer has any reason to remain op­er­a­tion­al or has no viable future. A li­quid­at­or is there­after appointed to close the company in a pro­fes­sion­al manner. There are two types of voluntary li­quid­a­tion in the UK – the members and the creditors’ voluntary li­quid­a­tion. The former does not require the in­volve­ment of courts because the company is able to settle its debt. A creditors’ voluntary li­quid­a­tion is initiated by directors where a company cannot pay its debts.
• Com­puls­ory li­quid­a­tion: This is when a company is forced to stop operating because it cannot pay its debts and a winding up order is issued by the court. The li­quid­at­or’s role is to in­vest­ig­ate why the company failed and to deal with its assets and li­ab­il­it­ies.

Companies can also be dissolved without begin li­quid­ated. This may apply to companies that are no longer operating. In­solv­ency in the UK is set out in the In­solv­ency Act of 1986.

Once the li­quid­at­or has been assigned, the next step is that they take control of the or­gan­isa­tion’s assets. Through­out the process, the li­quid­at­or is con­sidered the “go-to” person who assesses the company’s assets, dis­trib­utes them ac­cord­ingly, and manages meetings between the company and its creditors.

One of the main dif­fer­ences in the UK is that only in­di­vidu­als but not companies can file for bank­ruptcy, including sole traders and part­ner­ships. For LLC, the process is called li­quid­a­tion.

The li­quid­at­or is the executive and rep­res­ent­at­ive body of a company in li­quid­a­tion. When a company files for in­solv­ency, they shut down the company. By dis­solv­ing an LLC, it means that the company is no longer a legal business entity, meaning you won’t be expected to pay any fees or taxes, or file any more documents. An Official Receiver (li­quid­at­or) is appointed by the court to take pos­ses­sion of the assets of the business and dis­trib­ute them among the creditors.

Out of court set­tle­ments such as company voluntary ar­range­ments (CVAs) are very common in the UK. The agreement proposes that creditors will be paid some debts back over time. CVAs must be approved by 50% of share­hold­ers and 75% of creditors of a company. A li­quid­at­or or ad­min­is­trat­or can propose a CVA to take place. Once approved, a company will usually continue to trade, but is su­per­vised by an in­de­pend­ent ad­min­is­trat­or. The benefits of a CVA include rapid turn-around, cost savings and lack of public an­nounce­ment.

Ad­min­is­tra­tion is the first step in UK in­solv­ency pro­ceed­ings. Where a company faces debt repayment issues or threats from creditors, the court can appoint a licensed in­solv­ency prac­ti­tion­er. The action halts all legal pro­ceed­ings a company is involved in at the time. When in ad­min­is­tra­tion, companies can still be saved from li­quid­a­tion if, for example, they are acquired within a certain amount of time. Al­tern­at­ively, ad­min­is­tra­tion may be followed by a CVA or com­puls­ory li­quid­a­tion.

Li­quid­a­tion in the UK is com­par­able to Chapter 7 pro­ceed­ings in the US. Once the li­quid­at­or has been court-appointed, they collect and dis­trib­ute a company’s existing assets to settle out­stand­ing debt. A li­quid­at­or also de­term­ines if there was any mis­con­duct of business or fraud committed by the directors. Com­puls­ory li­quid­a­tion occurs when creditors are losing patience to collect their debt. In some cases, a director may oversee the com­puls­ory li­quid­a­tion if there are no funds to pay for a li­quid­at­or. Directors of companies are usually required to assist li­quid­at­ors in their duties along the way.

Since the li­quid­at­or ef­fect­ively assumes the role of managing director, he is re­spons­ible for running the company’s day-to-day business and ful­filling all its ob­lig­a­tions. He is also permitted to enter into new legal trans­ac­tions, as long as these serve the li­quid­a­tion of the company. The col­lec­tion of out­stand­ing re­ceiv­ables from business partners and customers is one of the most important steps in the set­tle­ment process.

At this stage, solid business know-how is needed. The li­quid­at­or’s goal is now to convert all assets that still exist within the company (e.g. buildings, land, machinery, materials) into liquid funds (or into assets that are easily ex­change­able for cash). The aim is to achieve the largest possible bank­ruptcy estate that works in the interest of creditors and share­hold­ers, which can then be dis­trib­uted in the pre­scribed order.

In li­quid­a­tion pro­ceed­ings, assets are usually dis­trib­uted between creditors. Where creditors have given loans (for example for property), these assets can be sold to recover their money. Monies left over will usually be split between remaining creditors. The li­quid­at­or follows a priority order when dis­tri­bu­tion assets. Any fees for bank­ruptcy or li­quid­a­tion are settled first, followed by debts for pref­er­en­tial creditors (including out­stand­ing wages or pension scheme payments). Creditors who hold a floating charge over an asset are third, followed by unsecured creditors, ac­cu­mu­lated interest on debt and lastly share­hold­ers.

The li­quid­at­or is also re­spons­ible for proper ac­count­ing. This includes an opening balance sheet starting at the date of the res­ol­u­tion to dissolve the company, a closing balance sheet at the end of the li­quid­a­tion process, and regular interim balance sheets for each completed financial year. In addition, he must prepare a li­quid­a­tion report, showing the current financial position of the company and the progress of the li­quid­a­tion.

During the li­quid­a­tion process, the li­quid­at­or is tasked with the job of preparing a final statement of account, which states the amount realised for assets and how it was dis­trib­uted, including receipts, cash payments, legal charges, and the li­quid­at­or’s fees. The average li­quid­a­tion takes around one year to finish.

In addition to taking control of the business, selling the company’s assets, and dis­trib­ut­ing proceeds to creditors, the li­quid­at­or may also be re­spons­ible for keeping the books and records of the closed company. After six years from the date of can­cel­la­tion, the li­quid­at­or may destroy any or all books and records in their pos­ses­sion according to UK law.

The last tier to be paid are the general creditors, which mostly consists of company stock­hold­ers, who are further divided into creditors with preferred stock and those with common stock (without voting rights). However, these are only paid if there is any money left over after all the other creditors have been paid in full. If there is no money left after the preferred share­hold­ers are paid, common share­hold­ers aren’t paid. However, this pre­sup­poses that all known creditors have already been fully serviced. In the event of a breach, the li­quid­at­or is liable with his own private assets.

Annoying, though sometimes un­avoid­able: If, once a company has been closed and is no longer re­gistered, it turns out that there are still assets as­so­ci­ated with a company (and that these still require ap­pro­pri­ate li­quid­a­tion measures), a so-called “sup­ple­ment­ary li­quid­a­tion” must take place. In this case, a court will take care of the dis­tri­bu­tion of the assets by way of an of­fi­cially appointed li­quid­at­or.

As a kind of “post-in­solv­ency manager”, the li­quid­at­or has two re­spons­ib­il­it­ies: On the one hand, the li­quid­at­or oversees the proper closing of a company, ensuring that the largest possible outcome in an insolvent’s estate is reached to benefit creditors and share­hold­ers. On the other hand, the li­quid­at­or acts in the interests of the gov­ern­ment by ensuring that former managing directors are no longer able to access the company accounts and therefore have no pos­sib­il­ity of un­law­fully putting assets aside. Securing a suitable li­quid­at­or is therefore a very important step.

Please note the legal dis­claim­er relating to this article.