Li­quid­a­tion of a company: Defin­i­tion

If a company or as­so­ci­ation becomes insolvent or holds too much debt, there are two possible options: in­solv­ency or li­quid­a­tion.

The decision all depends on what you want to happen to the company or as­so­ci­ation next. If you are still able to see a future for the or­gan­isa­tion, then you should consider in­solv­ency. On the other hand, if you’re sure that the fate of your company is sealed, you should consider li­quid­at­ing your assets as your final act as an owner, share­hold­er or member of the board of directors.

The li­quid­a­tion process is always the same in principle, re­gard­less of a company’s legal form.

Li­quid­a­tion is ap­pro­pri­ate if a cor­por­a­tion or part­ner­ship becomes insolvent and therefore needs to be dissolved. The aim is to make the company’s remaining assets (e.g. buildings, machinery, vehicles) liquid in order to meet all your li­ab­il­it­ies – i.e. to convert them com­pletely into cash or other funds that can easily be exchanged into cash.

The remaining assets are also called “li­quid­a­tion proceeds”. They are intended to:

1. Firstly, cover creditor’s claims
2. Secondly, be dis­trib­uted to share­hold­ers or passed to the owner.

The li­quid­a­tion process cannot begin until the company has been dissolved according to the legal framework. The dis­sol­u­tion marks the end of the business and initiates the li­quid­a­tion phase during which all remaining assets are revalued.

• Com­puls­ory li­quid­a­tion: occurs where a business entity is forced to close down by order from a court of law. In order to interfere with the company’s op­er­a­tions, the court needs to have a petition by someone who is connected to the company, such as the company director or any creditor who has not been paid.
• Members Voluntary li­quid­a­tion: when the or­gan­isa­tion’s man­age­ment team including the directors, members and share­hold­ers, decide to dissolve the company due to the fact that it is unable to carry on func­tion­ing. This is mainly because there are not enough funds to perform its op­er­a­tions ef­fect­ively.
• Creditors Voluntary Li­quid­a­tion: Directors start the procedure by realising and telling share­hold­ers the company is no longer viable, cannot meet creditor payments or has threat of legal action upon it - they are insolvent and must stop trading.

When a company defaults, it usually has two options: either liquidate its remaining assets, or file for bank­ruptcy.

Li­quid­a­tion is only possible if a company is either ter­min­ated regularly (e.g. because it was only invested for a certain period of time) or if in­solv­ency is rejected due to a lack of assets.

In­solv­ency pro­ceed­ings may be initiated if the company is insolvent, is in danger of in­solv­ency or if over-in­debted­ness is emerging. The in­solv­ency court then provides the company with an in­solv­ency ad­min­is­trat­or. This ensures that the company is either shut down or resolved in ac­cord­ance with legal pro­vi­sions, i.e. closed or re­hab­il­it­ated to resume normal business op­er­a­tions.

Similarly to li­quid­a­tion, the company loses all their assets in the event of li­quid­a­tion as part of in­solv­ency pro­ceed­ings. However, it stays in its current legal form. Therefore, in­solv­ency makes sense whenever a company needs to be re­hab­il­it­ated after going bankrupt. On the other hand, li­quid­a­tion is an option if ter­min­at­ing a company is a matter that has already been decided, or if an ap­plic­a­tion for in­solv­ency was rejected by the court because there wasn’t suf­fi­cient money to pay the cost of the court pro­ceed­ings.

Before a company is brought to a close, if first needs to be properly dissolved. This requires the share­hold­er’s decision, which must have been made by a three-quarter majority (unless otherwise stip­u­lated in the articles of as­so­ci­ation). Next, you must file for dis­sol­u­tion with the Companies House and HMRC. The company then becomes a res­ol­u­tion company.

From that point on, a li­quid­at­or takes over the set­tle­ment process. They must strictly comply with the ap­plic­able laws and should therefore be an expert in the field. A board member or the managing director is usually a good pick for this role. It is also possible to designate an external legal or natural person as the li­quid­at­or through a clause in the part­ner­ship agreement or a res­ol­u­tion in the Annual General Meeting. This in­di­vidu­al would then act on behalf of man­age­ment and represent them in the outside world, and in court.

The main objective of a li­quid­at­or is to generate as many assets as possible in order to benefit creditors and share­hold­ers. To this end, they are given full power of action and may also close new contracts if necessary.

A number of laws regulates exactly how the res­ol­u­tion process should be carried out. Certain special reg­u­la­tions apply to some legal forms e.g., for a general part­ner­ship, or a limited company.

However, the basic procedure for li­quid­at­ing a company is the same for all of them:

• Directors start the procedure by realising and telling share­hold­ers the company is no longer viable, cannot meet creditor payments or has threat of legal action upon it - they are insolvent and must stop trading.
• Share­hold­ers ask (online, by phone or in person) a licensed in­solv­ency prac­ti­tion­er to call a creditors meeting ASAP - usually in 2-3 weeks.
• A formal creditors meeting notice is sent to all creditors by the nominated li­quid­at­or (see here for examples of creditor meeting notices).
• A meeting of creditors occurs; in person or digitally online. No longer are physical meetings mandatory, unless it is requested by 10 in­di­vidu­al creditors, 10% in total number of creditors or 10% by value of creditors. The IP will lead the meeting and direct the process.
• The li­quid­a­tion will be approved by what is termed deemed consent unless is met with objection from at least 10% of creditors (in value or number). If there is an objection, then a vote will need to be held.
• Final balance sheet: In order to complete the detailed accounts, a final balance sheet should be made at the end of the process.

The company will not exist once it’s been removed (‘struck off’) from the companies register at Companies House. This can only take place once there are no longer any company assets, meaning that a material li­quid­a­tion has finally been completed. Once this can be confirmed by Companies House, then the company can of­fi­cially be removed from all registers. Once the formal li­quid­a­tion is complete, either the li­quid­at­or or a third party must keep the company books and documents on file for an ad­di­tion­al 10 years in order to make them available should the tax au­thor­it­ies care to begin a ret­ro­act­ive in­spec­tion of the books.

The final step is dis­trib­ut­ing the assets among the company share­hold­ers – provided that there are any remaining once the out­stand­ing creditors have been paid. However, this step can only take place at the end of a blocking year, which begins when the dis­sol­u­tion an­nounce­ment is published, and creditors are notified. The way money is dis­trib­uted among share­hold­ers depends on their nominal shares.

Li­quid­a­tion does not ne­ces­sar­ily have to happen only as a result of your company going bankrupt. Sometimes there are other reasons to do so, which might have nothing to do with in­solv­ency. These could include:

Sixty-seven year old Charlie is the head of a craft en­ter­prise and plans to retire after decades of suc­cess­ful work. His greatest wish is that one of his children should take over the family business and continue to run it. However, none of them seem to be in­ter­ested in this, but Charlie still doesn’t want to see his life’s work in the hands of an external buyer. Instead, he decides to liquidate his company. As the sole share­hold­er, he can decide to dissolve the company of his own ini­ti­at­ive, and start filing for li­quid­a­tion whenever he sees fit.

Somewhat frus­trated that his family business is coming to an end, Charlie is reluctant to deal with the set­tle­ment details himself. So, he hires his old friend Carl, a person he trusts and who has the necessary pro­fes­sion­al skills, and appoints him the official li­quid­at­or. From now on, Carl will take care of anything as­so­ci­ated with li­quid­at­ing Charlie’s company – including the public dis­sol­u­tion an­nounce­ment and informing creditors, as well as handling the ac­count­ing aspects.

Within the financial year, Carl is able to sell all the company machines, resulting in a con­sid­er­able sum of li­quid­a­tion proceeds. Charlie does not have to include the land his company is located on in the procedure, since he wants to keep it. Once all the creditor claims have been satisfied and all necessary li­quid­a­tion measures have been taken, Carl of­fi­cially dissolves the company and removes it from the companies register. Charlie takes re­spons­ib­il­ity for the business books and documents with the intention of safe­guard­ing them for the next decade. Now, he just has to wait until the end of the mandatory blocking year to start with­draw­ing from the company’s assets.

Please note the legal dis­claim­er relating to this article