Liquidation – The liquidation process

Last Updated
December 23, 2009

Liquidation is a way of dealing with corporate debts that you cannot pay when they become due. However, not all companies which go into liquidation are insolvent – some can afford to pay all their debts with their assets. Liquidation is also known as “winding up” a company. When a company is liquidated it is [...]

Liquidation is a way of dealing with corporate debts that you cannot pay when they become due. However, not all companies which go into liquidation are insolvent – some can afford to pay all their debts with their assets. Liquidation is also known as “winding up” a company.

When a company is liquidated it is brought to an end, stops trading and ceases to exist. Any assets and property of the company are redistributed to creditors.

Remember: Not all companies in liquidation are insolvent.

There are three types of liquidation

  • A members’ voluntary liquidation is where the directors or shareholders of a company decide to put it into liquidation and the company is solvent (there are enough assets to pay all the company’s debts).
  • A creditors’ voluntary liquidation is where the directors or shareholders of a company decide to put the company into liquidation and the company is insolvent (there are not enough assets to pay all the company’s debts).
  • A compulsory liquidation is where the court makes a winding-up order on the petition of an appropriate person, for example, a creditor.

Members’ voluntary liquidation

  • A majority of the company’s directors must make a statutory declaration of solvency in the five weeks before a resolution to wind up the company is passed.
  • The declaration will state that the company will be able to pay its debts in full within 12 months from the start of liquidation.
  • The declaration will include a statement of the company’s assets and liabilities
  • The liquidation process begins when the members pass a Companies Act 2006 resolution to liquidate the company voluntarily.

Creditors’ voluntary liquidation

  • The liquidation process begins when the members pass a Companies Act 2006 resolution to say it can’t continue in business because of its liability.
  • A meeting of creditors must be held within 14 days of the resolution.
  • Notice of the meeting must be sent to the creditors at least seven days before the meeting.
  • The directors must prepare a statement of affairs for consideration at the meeting, and appoint one of themselves to attend and preside over the meeting.
  • A statement of affairs must be given to the Insolvency Practitioner.
  • The directors must cooperate with the Insolvency Practitioner.

Converting a members’ voluntary liquidation to a creditors’ voluntary liquidation

The Liquidator can have a members’ voluntary liquidation converted to a creditors’ voluntary liquidation if they decide the company will not be able to pay its debts in full within 12 months from the start of liquidation.

The Liquidator calls a meeting of the creditors and the  members’ voluntary liquidation becomes a creditors’ voluntary liquidation from the date of the meeting.

Compulsory liquidation

  • A compulsory liquidation is where the court makes a winding-up order on the petition of an appropriate person, for example, a creditor.
  • A company is regarded as unable to pay its debts if a creditor is owed more than £750.
  • A creditor can petition for the company to be liquidated if they have sent the company a “statutory demand” and the company fails to: pay the amount stated on the demand, secure the debt against property, or agree a settlement of the debt to the creditor’s satisfaction

The court may also order the company to be wound up on the petition of:

  • the company itself;
  • the company’s directors or one or more members;
  • the Secretary of State for Business, Innovation and Skills
  • the Financial Services Authority (formerly the Securities and Investment Board); or
  • the Official Receiver.

Liquidator’s Duties

The Liquidator is appointed to wind up the company’s affairs. The liquidator does this by calling in all the company’s assets and distributing them to its creditors. If anything is left over, the liquidator distributes it among the members of the company.

Unless the court directs other arrangements, the liquidator must publish a notice of appointment in the Gazette. If the liquidation is voluntary, the liquidator must also give notice in a newspaper in the area where the company has its principal place of business.

In all liquidation cases, Liquidator must also notify the Companies House Registrar. In compulsory liquidations, the petition itself is not presented to the Registrar so it will not appear on the public records.

In a compulsory Liquidation, the Liquidator has a duty to send a report to the Government on the conduct of all directors who were in office in the last three years of the company’s trading. The report is sent to the Secretary of State for Business, Innovation & Skills, who then has to decide whether it is in the public interest to seek a disqualification order against a director.

During the liquidation process

If your company is insolvent, the accounting date is reset to start a new accounting period at the date the Insolvency Practitioner is appointed.

Ending the liquidation process

  • The Liquidator produces an account of the liquidation, which is presented to a final meeting of the company’s creditors and a final meeting of the members of the company. It is then sent to the Companies House Registrar.
  • The Registrar will register the account and publish its receipt in the Gazette.
  • Unless the court makes an order deferring the dissolution of the company, it is dissolved three months the account is registered at Companies House.
  • Once the company is dissolved, it ceases to exist.

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