What is liquidation?
Liquidation is the legal process of bringing a business to an end and distributing its assets to creditors. Liquidation usually happens when a company cannot pay its debts when they are due ( i.e the company is insolvent).
A liquidator is appointed to 'wind up' the affairs of the company. The company will no longer exist once it’s been removed (‘struck off’) from the companies register at Companies House. Liquidation does not necessarily mean that the creditors of the company will get paid. Rather, the purpose of liquidation is to ensure that all the company's affairs have been dealt with properly. This involves:
ensuring all company contracts (including employee contracts) are completed, transferred or terminated;
ceasing the company's business;
selling any assets;
settling any legal disputes;
collecting in any money owed to the company; and
distributing any funds to creditors and returning share capital to the shareholders.
Any surplus after repayment of all debts and share capital can be distributed to shareholders. When this has been done, the liquidator will apply to have the company struck off from the register at Companies House and dissolved, and the company ceases to exist.
Appointing a liquidator (insolvency practitioner)
You cannot liquidate your own company. Regardless of whether your business is solvent or insolvent, you are legally obliged to appoint a liquidator (a licensed insolvency practitioner) to liquidate a limited company in the UK.
The process of company liquidation is complex. A liquidator will:
settle any legal disputes or outstanding contracts;
gather and sell off the company’s assets;
meet deadlines for paperwork and keep authorities informed;
interview the directors, assess and investigate directorial conduct and report on what went wrong in the business;
pay liquidation costs and the final VAT bill;
keep creditors up to date and involve them in decisions where necessary
make payments to creditors; and
remove the company from the companies register.
Types of liquidation
Members' voluntary liquidation: This can occur when the company is solvent (has net assets over £25,000) and has enough assets to pay its debts. In this case the shareholders of a company can decide to put their company into liquidation.
Creditors' voluntary liquidation: This can occur when the company is insolvent (has net assets below £25,000). In this case the shareholders of a company can decide to put the company into liquidation, if the company does not have sufficient assets to pay all the creditors.
Compulsory liquidation: This occurs when the court makes an order for the company to be wound up (a 'winding-up order') on the petition of a creditor. If there is more than one director, all the directors must jointly present the winding-up petition - a single director cannot present a winding-up petition.
What is the process of Liquidation?
Members' voluntary liquidation
Perhaps you are ready to retire, or no longer want to run the business any more. The directors must make a formal declaration of solvency, which must:
include the name and address of the company and its directors;
be made by the majority of directors on a date no more than 5 weeks before the passing of the resolution for voluntary winding up;
be filed at Companies House;
state that the company can pay its debts and interest within a maximum of 12 months; and
include an up-to-date statement of the company's assets and liabilities.
It is a criminal offence to make a declaration of solvency without reasonable grounds.
The shareholders are then required to hold a general meeting of the company, pass a resolution for voluntary winding up, and appoint one or more liquidators for the company.
The shareholders must pass a special resolution for winding up, with exceptions:
when an extraordinary resolution is required, as the company resolves that it cannot continue its business because of its liabilities; or
when an ordinary resolution is required, as the articles of association of the company provide for it to be dissolved at a certain time, or following a certain event.
If it later turns out that the company is in fact not solvent, the liquidator will call a meeting of creditors and the liquidation becomes a creditors' voluntary liquidation.
Creditors' voluntary liquidation
Shareholders can still vote for a creditors' voluntary liquidation if the majority of directors do not make a declaration of solvency, or the company is insolvent. To vote for a voluntary liquidation, the shareholders must:
hold a general meeting of the company; and
pass a resolution for voluntary winding up
The company can nominate an authorised insolvency practitioner as liquidator. It must also call a meeting of creditors (usually on the same day as the shareholders' meeting) at which they are informed of the details of its financial affairs. The creditors can also nominate a liquidator and their nomination will usually override that of the shareholders, if different.
You are still required to call a meeting of shareholders and ask them to vote.
Seventy-five percent (75%) (by value of shares) of shareholders must agree to pass a ‘winding-up resolution’.
Following the resolution, you must:
Appoint an authorised insolvency practitioner as liquidator to take charge of liquidating the company.
Submit the resolution to Companies House within 15 days.
Advertise the resolution in The Gazette within 14 days.
Compulsory liquidation
A director can ask a court to order the company to stop trading and be liquidated (‘wound up’). This process is known as ‘compulsory liquidation’.
To do so, you must demonstrate to the court that:
the company cannot pay its debts of £750 or more
Seventy-five percent (75%) (by value of shares) of shareholders agree that the court can wind up the company
Your company can be based anywhere but the majority of its business must be conducted in England, Scotland and Wales.
How to apply?
Complete a ‘winding up petition form’ (Comp 1 form) and send it to the court alongside:
a Comp 2 form confirming the details of your petition
the winding-up resolution from the shareholders
Where you send the petition depends on how much ‘paid-up share capital’ your company has. This can be found on the Companies House register.
If your paid-up share capital is £120,000 or more submit your petition online. It will go to the High Court. If your paid-up share capital is below £120,000 locate your nearest court that deals with bankruptcy. You can submit your petition online if it’s one of these courts:
Admiralty and Commercial Court.
Chancery Division.
Companies Court.
High Court (including Bankruptcy Court).
London Mercantile Court.
Rolls Building.
If your nearest court is not a court listed above, you will need to submit the petition by post. The Fees (at the time of writing) are as follows:
£1,600 to submit the petition
£280 for the court hearing
After you apply
You will receive a date for the hearing if the court accepts your petition.
Prior to the court hearing, you must:
serve a copy of the petition to your company and fill in a certificate of service to let the court know you’ve done this
put an advert in The Gazette at least 7 days before the hearing
send a copy of the advert and the certificate of service to the court
The court hearing
You or your solicitor must attend the court hearing. You do not have to give any evidence.
If the court grants a winding-up order, the court will put an official receiver in charge of the liquidation. The official receiver will begin liquidating your company. A copy of the winding-up order will be sent to your company’s registered office.
Duties of a director during the process
Once a liquidator is appointed, your role as a director will change. You will:
no longer have control of the company or anything it owns.
no longer act for or on behalf of the company.
If you are a director you must:
provide the liquidator with any information about the company they request.
hand over the company’s assets, records and paperwork.
allow the liquidator to interview you if they ask.
You can be banned from being a director for 2 to 15 years or prosecuted if the liquidator decides your directorial conduct at the time of acting as a director was “unfit”.
“Unfit conduct” includes permitting a company to continue trading as a business when it is unable to pay its debts.
Re-using company names
If you were a director of a company in compulsory liquidation or creditor’s voluntary liquidation, you are banned for 5 years from creating, managing or promoting any business with the same or similar name to your liquidated company. This includes the company’s registered name and any trading names (if it had any).
The three exceptions to this rule are where:
the business is sold on by a licensed insolvency practitioner, within a period of 28 days you provide legal notice of the purchase to the creditors of the old company, and you place an advertisement to this effect in the Gazette.
you obtain the court’s permission to use the name
you are a director or have been involved with another company that’s been using the same or a similar name as the liquidated company (eg a subsidiary company) for at least a year
How long do companies stay in liquidation?
In most cases a liquidation would last for just one year. However, it can be longer for more complex cases. The process of liquidation will depend on the circumstances of each individual case (e.g. the nature of the assets involved, how long it takes the liquidator to realise assets for example freehold property, resolve legal claims and how quickly those involved act). Once the process has been completed, the company will be dissolved and will cease to exist.
Specialist Business and Commercial Solicitors
How can Pure Business Law help?
We are specialist business and commercial law solicitors based in Bedford and London and operating nationally. If you are a director or are involved in a business you are looking to liquidate, please contact us today and speak to one of our specialist business solicitors.
Whether you need advice on the complex process of liquidation or whether you would like us to act for you in relation to court proceedings, we are here to help.
Our fixed fee lawyers have an average of over 20 years’ experience in transactions of such nature.
If you would like to discuss anything in relation to the above or any other issues relating to companies, shares, the business liquidation procedure, or any other business or commercial matter please contact us and speak to one of our specialist fixed fee solicitors. Pure Business Law is regulated by the Solicitors Regulation Authority and is a licensed member of the Law Society of England & Wales.