The decision has been made: you want to close your limited company. The reasons for dissolution can vary, but what happens now? Simply ceasing business operations is not enough. A limited company must be dissolved in accordance with statutory regulations and according to a fixed procedure.
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?
- What is a liquidator? A definition
- Liquidator: Competencies and proceedings
- Responsibilities: What does a liquidator do?
- Supplementary liquidation
- Conclusion: The liquidator – an important role
What is a liquidator? A definition
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.
A liquidator is a natural or legal person who winds up a company. This involves taking care of all tasks that arise between the dissolution and the termination of the respective company, such as distributions to creditors, proper wrap-up accounting, and the distribution of assets.
The liquidator independently takes care of all liquidation measures, while strictly complying with the applicable law for the type of company he is dealingwithand 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.
Be careful not to confuse a liquidator with an insolvency practitioner, who is appointed and supervised by the insolvency court to assist a company in the proper conduct of insolvency proceedings in accordance with UK insolvency law.
Liquidator: Competencies and proceedings
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 theInsolvency 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.
Responsibilities: What does a liquidator do?
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.
Company voluntary arrangement
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.
Going into administration
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.
Winding up in the narrower sense
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.
Conversion of other assets into cash
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.
Satisfying creditor claims
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 liquidationreport, showing the current financial position of the company and the progress of the liquidation.
Closing the company
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.
Storage of business books and accounting records
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.
Conclusion: The liquidator – an important role
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.