The Liquidation Process: What company directors need to know

Entering liquidation can feel daunting, but having a roadmap of what to expect can make the process less stressful. Here is an overview of the liquidation journey and what directors should prepare for along the way.

What is liquidation?

Liquidation, sometimes called winding up, is the formal process to close up a company's affairs and distribute its assets. An insolvent company—one that cannot pay its debts—typically goes into either voluntary liquidation initiated by the directors or compulsory liquidation initiated by court order. The end goal is to sell (liquidate) the company's assets and use the proceeds to pay off debt. A solvent liquidation is where all creditors have been paid and the remaining assets are distributed to the shareholders.

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Starting the liquidation process

Voluntary liquidation begins when the shareholders pass a resolution to place the company into liquidation.

Compulsory liquidation starts when a court orders the company to be wound up after a successful petition from creditors, shareholders or even directors, over unpaid debts. The court appoints an official receiver to oversee the process.

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Appointing a liquidator

In a creditors' voluntary liquidation (CVL), directors choose and propose an insolvency practitioner (IP) as liquidator, whom creditors approve in a meeting. The director’s choice of insolvency practitioner is mostly never challenged.

In compulsory liquidations, the official receiver becomes the initial liquidator. Creditors can later vote to appoint an IP in the role instead.

The liquidator takes over management of company operations and has an obligation to act in the creditors’ best interest.

This is good news for directors in that the uncomfortable conversations one might expect to have with creditors can be avoided by them.

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Liquidation asset distribution rules  

The liquidator follows legal priority rules for asset distribution:

• Secured creditors get first claim on proceeds from assets attached to their security. This could be property, vehicles, machinery, or equipment.
• Preferential creditors like employees get paid next.
• Secondary preferential creditors such as some HMRC debts (VAT, PAYE, Employee’s NICs, CIS deductions) are next.
• Secured creditors with a floating charge. Floating charges cover things that the business would use to generate business, stock for example. Floating charges provide some security to the lender, but recovering money is more difficult.
• Unsecured creditors are paid last from any remaining proceeds, this includes most trade suppliers.
• Shareholders receive only after all creditors are paid in full. As this rarely happens in a CVL, shareholders typically receive nothing.

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If there is not be enough money to pay every creditor in full, any debt left over will be written off, unless a director has provided a personal guarantee to secure borrowing.

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Director obligations in liquidation

As a director, you must continue to fulfil legal duties during liquidation. Liquidators rely heavily on the cooperation of directors to access all necessary information related to company operations and assets.

• Therefore, as a director, it is best to cooperate fully with the liquidator to help them wind up operations. Respond promptly to all requests made. These could be:
  • Provide additional company information - The liquidator may request more specifics on company assets/liabilities, agreements, financial documents, shareholder/ownership details, etc. They need a complete picture to distribute assets properly.
  • Help access properties or assets - Requests for access to company premises, inventory, vehicles, banking/accounting systems etc. to catalogue and secure items of value.
  • Communicate with employees, suppliers, stakeholders - The liquidator may need directors to formally or informally update key company contacts on the liquidation status.
  • Assist with asset sales - Directors may get requests to help show properties to potential buyers, provide demonstration of inventory/equipment, give background on Intellectual Property assets, etc.
  • Review and sign off formal documents - Requests to review draft reports, financial statements, meeting minutes, asset inventories and sign to confirm accuracy and completeness.
  • Attend meetings - Directors may be requested to attend initial meetings, creditor meetings or other case conferences to discuss company particulars and approach.
• Provide company records including accounts, contracts, and board minutes. Failure to provide information is a criminal offence.
• Help realise and collect company assets to distribute to creditors. Essentially, the liquidator will rely on directors helps to gather a full picture of assets that creditors have a claim over, and directors are obliged to provide all reasonable assistance with locating and securing those assets so they can be valued and liquidated with proceeds going to repay debts.

The process takes around 12 months on average to complete but can vary significantly in complex cases. Throughout, the liquidator remains responsible for reporting to creditors and filing necessary documentation like the notice of appointment with Companies House.

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What happens when liquidation ends?  

Once asset distribution concludes:

• The liquidator files final notices to remove the company from the companies register.
• The company is dissolved and officially ceases to exist. "Dissolved" is the formal legal term indicating a company as an incorporated entity has been wound up, its affairs concluded, and corporate existence eliminated following liquidation. It signals the end of a company as a legal business entity.              

While daunting, remembering the liquidator acts in creditors’ interests can help directors focus on fulfilling duties to ease the winding up process.

This guide gives directors facing liquidation a helpful overview of what to expect. Don't hesitate to contact Even Keel Solutions for personalised advice for your situation. Though insolvency feels bleak, starting liquidation lets you take control to maximise recoveries for all and provides a way forward for directors.

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References:

- The Insolvency Service - Liquidation - A Guide for Creditors.

- ACCA - Liquidations and receiverships.

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