How to Liquidate a company?

Business failure, despite the best will in the world, can be unavoidable. And, sadly,the rate of UK insolvencies has been rising. Government figures from January reported that company insolvencies were at a 30-year high in 2023, although because there are more companies now the actual rate of insolvencies was lower than when it peaked during the financial crisis of 2008-9.

The vast majority of registered insolvencies in 2023 were creditors’ voluntary liquidations (CVLs) at just over 20,000 out of a total of 25,158 registered insolvencies. While a CVL is clearly the choice for most there are a wide range of alternatives, and the business owners will want to consider them all before deciding on which is best. 

Many companies are dissolved rather than liquidated – to find out more about the process of dissolving a company, please see the companion article How to dissolve a company. 

Liquidation

Liquidation is the closure route for most insolvent companies, that is ones that cannot pay their debts when due. Creditors are first in the queue to receive any funds the insolvent company may have and shareholders and directors follow behind. The services of a liquidator cost from £1,000 plus VAT. Most people will pay more,how much more depending on the type of liquidation sought and its complexity and difficulty.

The role of the liquidator

The liquidator is either an authorised insolvency practitioner or an official receiver. Both will:

• Settle legal disputes and contracts.
• Sell the company’s assets and pay off creditors with the proceeds.
• Keep on top of paperwork and maintain contact with relevant authorities.
• Pay liquidation costs and the final VAT bill if any.
• Keep in touch with creditors and involve them in decisions if necessary.
• Interview directors to find out what went wrong in the company.
• Take the company off the register at Companies House.

Members’ voluntary liquidation

A members’ voluntary liquidation (MVL) is only for companies that can pay their debts. It needs the services of a liquidator (authorised insolvency practitioner).

Typical situations when an MVL would be appropriate are:

• When the owner reaches retirement age.
• A family business without a suitable relative to take it over.
• When owners want to quit the business and do something else with their lives.

Capital left over from the sale of assets is liable for capital gains tax (CGT) rather than income tax. This is advantageous, since, even after the autumn 2024 budget, which raised the lower rate of CGT to 18% and the higher rate to 24%,the rates are still less than income tax rates.

In addition, business asset disposal relief may be available. This taxes gains on sales of qualifying assets at 10% but, following the autumn budget, this will go up to 14% on 6 April 2025 and then to 18% at the start of the 2026 tax year.

Business owners with about £35,000 left over once all debts are settled are likely to find an MVL the most tax-efficient way of liquidating their company.

MVL: the process

A declaration of solvency is needed for an MVL, which will involve a review of a company’s assets and liabilities. The declaration will include a statement that the directors have assessed the company and believe it can pay its debts with interest at the official rate. The statement must include basic details about the company, the timescale for it to repay its debts and a review of its asset sand liabilities.

Once this is drawn up, the declaration must be signed in front of a solicitor or notary public and the shareholders have to pass a resolution for a voluntary winding up. At that meeting the directors must appoint a liquidator who will manage the winding-up process. 

The winding-up resolution has to be advertised in the Gazette – the official record of Companies House – within 14 days and the signed declaration must be sent to Companies House.

Once the liquidator is appointed he or she will be in charge and the directors’responsibilities will change.

Creditors’ voluntary liquidation

This is the route for owners who want to close a limited company that cannot pay of fits creditors. To get the ball rolling a director needs to call a shareholders’meeting at which a special resolution must be passed. This will begin the winding-up process. A director or directors must then:  

• Appoint a liquidator.
• Send the resolution to Companies House.
• Advertise in the Gazette.

They should then set up a creditors’ meeting within 14 days of passing there solution, giving them seven days’ notice of it, and advertise in the Gazette. At the meeting a statement of affairs (summary of assets and liabilities) must be presented and the liquidator should get a copy.

Once all the remaining assets have been converted into cash and disbursed to creditors in order of priority the company can be struck off. This would usually take place about three months after the final meeting with the liquidator. The liquidator is there to act in the interests of creditors not those of the company.

Compulsory liquidation (winding-up petition): creditor’s application

A winding-up petition is applied for at the appropriate court by a creditor, and companies that receive one have to act fast to avoid being closed down. This happens when the company and the people it owes money to can’t reach an agreement on loan repayments. It will have been preceded by a statutory demand for repayment, which delinquent companies have to respond to within 21 days.  

If the owner doesn’t start making arrangements with creditors within seven days of receiving a winding-up petition the company could be issued with a winding-up order by the court, which will close it down.

Often HMRC will be the biggest creditor in a compulsory liquidation as failing companies fall further and further behind with VAT or national insurance or corporation tax payments.

If the court grants the petition the company will be put into liquidation and any remaining assets will be sold by the liquidator. Directors may, depending on the circumstances, be able to apply for redundancy payments.

Compulsory liquidation (winding-up petition): directors’ application

When directors realise the company’s financials are so poor it cannot pay its debts they also can apply for a compulsory liquidation. In this case they have to show the court that the company has debts of £750 or more that it cannot pay and that 75% (by share value) of directors agree that the court can wind up the company.

The application goes to different courts depending on whether the paid-up share capital is more or less than £120,000. The petition costs £2,600 and there is a £280 fee for the court hearing. 

Company voluntary arrangement

A company voluntary arrangement (CVA) is an alternative to liquidation for companies that have a chance of regaining viability. CVAs allow companies to pay off their debts over a fixed period and give some breathing space to tackle any operational and management problems that have led to the insolvency.

The directors remain in control despite the appointment of administrators. Also any legal action is stayed while the CVA is in place so the bailiffs will not be calling. Furthermore, if bank accounts have been frozen as a result of a winding-up order, they can be unfrozen with a validation order. In addition,customers and suppliers do not need to be told of its existence.

The directors must appoint an insolvency practitioner, who acts as both nominee and adviser, who will usually assist in the proposal to shareholders in the latter capacity. A majority of at least 75% of unsecured creditors must agree to the proposal for it to take effect. 

One disadvantage of CVAs is that creditors are able to act against the company while a CVA is being drawn up so sometimes businesses that have a chance of staying afloat are pushed under. Also they are often for between three and five years, which may be too long for some parties.

Administration

Rather than folding-up, an insolvent business can go into administration. The appointment of an administrator can be made by the directors, creditors or the court. 

Once in administration the company is no longer subject to creditor enforcement action and buys some time to sort itself out. The administrator will aim to save the company but if this does not seem possible he or she will seek a sale of the business or its assets while it continues to trade. The administrator will seek to obtain a better return for creditors than if the company was wound up without first being in administration.

The administrator has eight weeks to put together administration proposals and the administration period will end after 12 months but this can be extended.

Where a company has failed and is unsaleable, administration is a way of liquidating assets and distributing proceeds to creditors, which are ranked as secured,preferential (employees), unsecured creditors and shareholders and members.

Pre-pack administration

In a pre-pack administration the business is sold as a going concern and an administrator appointed once the sale is complete. Insolvency practitioners value the company and produce a statement of affairs. It can be sold to an existing company or a new one (which can be run by directors of the old one).

As the business is sold as a going concern, its value and status will be better preserved than in other scenarios. For a pre-pack to work there needs to be a readily identifiable buyer or buyers.

Receivership

This can be a way companies can navigate their way out of financial difficulties. A business may go into receivership if its bank loses confidence in its abilities to pay back the loans it has made to it.

The bank will send in investigating accountants to report on the company’s financial health. If the books look grim the bank will be advised to appoint a receiver (which will be done at the request of the company) or administrator.

Receivers have a free hand and can remove directors and fire employees and sell assets as they see fit. They must pay debts so far as they are able to (arrears of pay and holiday pay come first) and will devise a strategy aimed at saving the company. 

Receivership is something of an emergency procedure and can do further damage to companies in that assets may be sold at below market price, valued employees and directors can be lost, trading reduced and unsecured creditors often won’t get much of their money back. That said, in situations where directors have lost control of a company the shock treatment of receivership can save the business,although it is likely to survive in a different form. 

Now I know the options, which one is best for me?

A company owner who is having to contemplate a liquidation is likely to be in a highly stressful situation, with creditors banging on the door, whether literally or through other means, and unfriendly letters arriving from HMRC. This is a lot to go through on your own and it is invaluable to be able to turn to a trusted third party for guidance and insights into the best way forward.