What does it mean to liquidate a business? At BRI Business Recovery and Insolvency, we work with businesses all over the UK to help them with a liquidation process.
If you have found yourself or your company in financial difficulty and would like some professional advice, contact our team today
What Does Liquidating a Business Mean? And How Does it Happen?
If a company is insolvent, that is to say, it either cannot meet its liabilities as they fall due (the cash flow test) or its liabilities are greater than its assets (the balance sheet test), then it may be necessary to liquidate the company if other options are not available.
A company can be liquidated either via a Court process, known as compulsory liquidation, or from passing the necessary board and shareholder resolutions to place itself into liquidation, otherwise known as voluntary liquidation. The word ‘voluntary’ means that once the directors became aware that a liquidation was required, they placed the company into liquidation, not that the company voluntarily put itself into an insolvent position.
Compulsory Liquidation vs Voluntary Liquidation
There are two main types of liquidation that affect businesses: compulsory liquidation and voluntary liquidation. Here are the main differences and the processes:
Compulsory liquidation
Compulsory liquidation is the Court process for liquidating a company. It is available to creditors (people owed money by the company), directors, and shareholders, who can all act as the petitioner. A winding-up application is made to the Court by the petitioner, which states the reasons why the company should be liquidated. The reason given for the winding-up application in the vast majority of cases is due to the company being insolvent (as per the tests stated above); however, it is also possible for companies to be wound-up on other grounds, such as public interest or boardroom deadlock.
The whole winding-up process is not laid out in this article, but the petition must be served on the company and advertised prior to a hearing date. At the hearing, an order may then be made liquidating the company. At this point, trade will cease immediately, employees will be made redundant, and all of the assets of the company will vest in the liquidator, who, at least in the first instance, will be the official receiver (i.e. a government department).
Voluntary liquidation
With a voluntary liquidation process, the directors of a company, normally upon receiving advice from their accountant or other advisor, will seek the assistance of an insolvency practitioner to place their insolvent company into liquidation.
In this scenario, the insolvency practitioner will be engaged by the company to first assess that the company is indeed insolvent and if liquidation is the most appropriate insolvency procedure for it (the other insolvency procedures or alternative restructuring options available are not discussed in this article). Once the advice is clear that a liquidation is necessary, relevant paperwork is produced for the directors to first pass a resolution commencing the liquidation process, followed shortly thereafter by a special resolution of the shareholders to be passed, which formally places the company in liquidation, and finally, a decision procedure of creditors ratifying the appointment of the liquidator(s).
Technically, the voluntary liquidation process has a slightly different effect than the compulsory liquidation process. Although the powers of directors cease upon liquidation and the assets immediately vest in the liquidation estate, certain things can’t be considered to have happened automatically, therefore normally, either the directors (prior to the date of liquidation) or the liquidator(s), after the date of liquidation, will confirm the cessation of trade of the business and make staff redundant.
What Happens to the Assets of the Liquidated Company
The liquidator has a duty to get in and realise all of the assets of the company. The liquidator will therefore seek to recover debts owed to the company, as well as achieve a sale of all assets. This is normally done with the assistance of appointed specialist agents. All of the proceeds of the sales go into the liquidation estate, with these funds then used to discharge the costs of the liquidation (such as the liquidators’ and agents’ fees) before being made available for distributions to creditors.
Impact of Liquidation on Creditors (those owed money by the company)
Once a director is aware that a company will enter liquidation, they have a duty to mitigate the losses to creditors. Without giving an exhaustive list of the actions they can take to achieve this, often a primary course of action is to cease all trading operations in order to not create any further liabilities. Therefore, it is often the case that directly following the director’s making this difficult decision, orders for customers are not completed and/or work on a project/development, etc ceases. This will have an effect on any customers who are expecting goods/services and, in some cases, have paid a deposit in advance.
At the date of liquidation, all sums owed by the company become claims in the liquidation estate. Once the liquidator has realised assets and defrayed costs, the liquidator will then look to make distributions to creditors. There are different classes of creditors created either by legal instruments, such as secured lending, or as defined by Insolvency legislation, such as preferential or unsecured creditors.
Sums are paid out to a certain class of creditor pari passu (i.e. shared equally amongst all of the claimants based on the value of their claim) with insolvency legislation stating the order of priority for payments to different classes of creditor, with unsecured creditors ranking below ordinary preferential and second-class preferential claims. Most consumer creditor claims rank as unsecured creditors.
Impact of Liquidation on the Business Directors
Whether a compulsory or voluntary liquidation of a business, the appointed liquidator will have a duty to review the conduct of anyone who has been a director of the company in the 3 years prior to the date of liquidation. They will then submit a conduct report to the Department for Business and Industry who will assess if any action should be taken against the director with regard to disqualification proceedings.
In addition, the liquidator will independently assess if the conduct of the directors has created the possibility for any claims that can be brought against the directors in order to achieve recoveries for the liquidation estate. Such claims are defined within insolvency legislation and generally centre around misconduct of the directors leading to unnecessary harm to creditors, which is to be remedied via payments to the liquidation estate.
With it being the case that the liquidation acts as a crystallising event for debt owed by the company, this will also normally trigger any personal guarantees given by directors. It is not unusual for directors to have to deal with losing their main source of income, being their business, while also being pursued by creditors for company debts which they have guaranteed at some point. For more information on the impact on directors, please see our previous article What Happens to the Director of a Company in Liquidation. If you find yourself in financial difficulty, please contact our team.
What Should I Do Now My Business Needs a Liquidation or is in Liquidation
If you have been notified of the liquidation of a client, supplier, customer, or other party that impacts you and guidance is required, please do not hesitate to contact us.
Similarly, if one of your clients needs further guidance or assistance with respect to what actions need to be taken now that you have become aware of the company’s financial difficulties, please do not hesitate to contact one of the BRI offices for a free and confidential initial consultation. We are here to help.