Corporate Insolvency

What is liquidation?

Liquidation is a legal process in which a liquidator, who must be a licensed insolvency practitioner, is appointed to ‘wind up’ the affairs of a limited company. At the end of the process, the company ceases to exist. The purpose of liquidation is to ensure that all the company’s affairs have been dealt with properly. This involves:

  • Ensuring that all company contracts (including employee contracts) are completed, transferred or otherwise brought to an end.
  • Ceasing the company’s business unless demonstrably, continued trading, albeit temporarily, would be for the benefit of the liquidation.
  • Collecting money owed to the company.
  • Distributing any funds to creditors and in a members’ voluntary liquidation after payment of all debts returning share capital and any residual surplus to the shareholders.

When this has been done, and the requisite notification has been sent to the Registrar of Companies, the company will be removed from the register at Companies House and dissolved, which means it ceases to exist.

What types of liquidation are there?

Members’ voluntary liquidation (or members voluntary winding-up) – this is when the shareholders of a company resolve to put it into liquidation and there are enough assets to pay all the debts of the company, i.e. the company is solvent.

Creditors’ voluntary liquidation (or creditors’ voluntary winding-up) – this is when the shareholders of a company resolve to put the company into liquidation, but there are not enough assets to pay all the creditors, i.e. the company is insolvent.

Compulsory liquidation (or compulsory winding-up) – this is when the court makes an order for a company to be wound up (a ‘winding-up order’) on the petition of an appropriate person when it is insolvent or it is deemed to be in the public interest for it to be wound up.

If you are a director or a shareholder and you are also a creditor of your company, you may wish to present a winding-up petition on the grounds that the company cannot pay its debts.

What are the alternatives to liquidation?

Informal arrangement – the company could consider writing to all its creditors to see if a mutually acceptable agreement can be reached. It is advisable to include a timetable of when payments will be made.

Company voluntary arrangement (CVA) – this is a formal version of the arrangement described above. The directors formulate a proposal with the help of an insolvency practitioner, who supervises the arrangement and pays the creditors in line with the accepted proposal.

Administration – this is a procedure that gives the company some breathing space from any action by creditors. A company may enter administration to enable:

  • The company to survive as a going concern.
  • A better result to be achieved than in an immediate winding up.
  • Realisation of property for the benefit of secured or preferential creditors.

The procedure is managed by an administrator, who must be a licensed insolvency practitioner and who may be appointed by the court, a floating charge holder, or the company, or its directors.

What happens when a company goes into liquidation?

The liquidator takes control of the company’s affairs and almost all powers of the directors cease. The liquidator disposes of all the company’s assets and after paying the costs and expenses of the liquidation distributes any remaining funds to the creditors.

In a creditors’ voluntary liquidation, the liquidator has a duty to report to shareholders and creditors annually on progress in the liquidation and to the Secretary of State, under the Company Directors Disqualification Act 1986, regarding the conduct of the company’s director(s).

As soon as the affairs of the company are fully wound up, the liquidator will issue a notice to that effect to shareholders and creditors accompanied by a final report.

What are the directors’ duties in a voluntary liquidation?

In voluntary liquidation proceedings, the company’s directors must:

  • Provide information about the company’s affairs to the liquidator and attend interviews with the liquidator as and when reasonably required.
  • Look after and hand over the company’s assets to the liquidator, together with all its books, records, documents of title, insurance policies and any other papers relating to its assets and liabilities.

What happens to the company’s debts?

The creditors lodge claims with the liquidator and will look to the liquidator for payment out of the company’s assets. If there are insufficient assets to pay the creditors in full, the director or shareholder is not normally liable for any shortfall unless he or she has provided a personal guarantee to the creditor. In short, the debt is written off.

Who pays for the liquidation?

The costs of liquidating a solvent company are normally paid out of the company’s assets. The costs include disbursements, i.e. money the liquidator has to lay out for advertising, insurance etc, and the liquidator’s own costs (remuneration) which is approved by the creditors, or a creditors committee if one is formed. In a creditors’ voluntary liquidation in the event that there are insufficient assets to pay the costs, the director(s) and/or shareholder(s) can in appropriate circumstances fund them personally. In a compulsory liquidation where there are no or minimal assets, the Official Receiver will be appointed and remain liquidator and the costs of his activities will be government-funded.

When will the voluntary liquidation end?

Liquidation ends when the winding-up process has been fully implemented. Dissolution will follow after the Liquidator has reported in a members’ voluntary liquidation to shareholders and in a creditors’ voluntary liquidation to creditors that the affairs of the company are fully wound up and the Registrar of  Companies is notified. How long the liquidation takes will depend on the circumstances of the individual case.

Who can put a company into compulsory liquidation?

A petition for the winding up of a company is usually presented to court by a creditor. Less frequently, the company itself, its directors or a shareholder may petition, as (in some circumstances) may an administrative receiver, an administrator, a supervisor of a voluntary arrangement, the Secretary of State for Business, Energy and Industrial Strategy, the Financial Services Authority, the clerk of a magistrates’ court, the Official Receiver or a member state (EU) Liquidator.

A winding-up petition can still be presented even if a company is already in administrative receivership or voluntary liquidation.

In what circumstances can a winding-up order be made?

A winding-up order can be made if the company:

  • Has decided that it should be wound up by the court.
  • Registered as a public limited company more than a year previously but has not yet been issued with a trading certificate.
  • Is an ‘old’ public company
  • Has not begun trading within a year of its incorporation or has suspended its trading for a whole year.
  • Has less than two shareholders, unless it is a private company limited by shares or guarantee.
  • Cannot pay its debts.
  • Should be wound up because the court forms the opinion that this would be just and equitable.

In which Court should a winding-up petition be presented?

The winding-up petition should be presented in the High Court, District Registry or county court that deals with insolvency matters and covers the area where the company’s trading address or registered office is situated.

What is the procedure for presenting a winding-up petition?

To ensure that all legal requirements are met, it is usual to instruct a solicitor to deal with issuing a winding-up petition. To present a winding-up petition, you cannot just complete the petition and present it to the court. If there are legal proceedings, this can result in costs being awarded against either party. For example, costs could be awarded against a person presenting a winding-up petition if the court believes that the winding-up procedure has been used in inappropriate circumstances where the debt is clearly defended/disputed.

Insolvency law requires that before the court can hear the petition, statements of truth must be lodged at court verifying the winding-up petition. The petition must usually be served on the company at its registered office. An affidavit of service of the petition must be filed at court and the petition must be advertised in the London Gazette at least 7 days after the petition is served on the company and at least 7 days before the hearing. Further statements of truth may be required if, for example, you wish to withdraw the petition.

What are the costs of putting a company into compulsory liquidation?

  • Petition deposit of £2,600 towards the costs of administration of the liquidation.
  • A court fee of £280.
  • The costs involved in advertising the petition in the London Gazette, using a process server for the service of a statutory demand.
  • Any costs for instructing a solicitor.

What happens after a company goes into compulsory liquidation?

Usually, the Official Receiver (who is both a civil servant in The Insolvency Service and an officer of the court) will be appointed liquidator of the company on the making of a winding-up order. The Official Receiver has a duty:

  • As official receiver
    1. To ensure that notice of the winding-up order is advertised in the Gazette and in a local newspaper.
    2. To investigate the affairs of the company and to establish the cause of its failure (by obtaining information from the directors of the company and from third parties, such as the company’s bankers, accountants and solicitors).
  • As liquidator
    1. To collect and realise all assets and to the extent possible pay creditors.

The Official Receiver may instigate a “decision procedure” to appoint an insolvency practitioner as liquidator in his or her place, but, if this happens, he or she still has a duty to investigate the company’s affairs. So, two people may be involved in the liquidation:

  • The liquidator, who is responsible for collecting and realising the assets and paying the creditors.
  • The Official Receiver, who investigates the company’s affairs.

The Official Receiver also has a duty to make a report to the Secretary of State under the Company Directors Disqualification Act 1986 regarding the conduct of the company’s director(s).

What are the duties of a director in compulsory liquidation proceedings?

In compulsory liquidation proceedings, the company’s director(s) must:

  • Provide information about the company’s affairs to the Official Receiver, probably initially over the telephone, but later at a formal interview at the Official Receiver’s office.
  • Provide information about the company’s affairs to any insolvency practitioner who is appointed liquidator of the company and attend for interview when reasonably required.
  • Look after and hand over the company’s assets to the liquidator or Official Receiver, together with all its books, records, documents of title, insurance policies and other papers relating to its assets and liabilities.

When will compulsory liquidation end?

How long liquidation takes will depend on the circumstances of the individual case (e.g. the nature of the assets involved and the complexity of the liquidation), but once the process has been completed the company will be dissolved and cease to exist.

What is receivership?

A receivership is where a charge-holder, normally a bank, appoints a licensed insolvency practitioner to realise sufficient of the company’s assets to pay off the debts owed to the charge-holder. The key difference between receivership and liquidation is that the receiver has no responsibility to pay the general body of creditors. The receiver is concerned principally in clearing the charge-holder’s debt.

What is directors’ disqualification?

In all formal insolvencies except CVA, the office holder insolvency practitioner has to prepare a report on the conduct of the director(s) under the Company Directors Disqualification Act 1986. The Department for Business, Energy & Industrial Strategy considers the report and if they consider it appropriate they can issue court proceedings against a director to have him or her disqualified from holding directorships for a period of anything up to 15 years. Holding a directorship includes directly or indirectly taking part in the formation and management of a limited company. The proceedings are civil and not criminal