Understanding the liquidation process can keep you prepared for the worst scenario. If you find yourself in a situation where you have rapidly run out of cash, it is highly likely that your business is insolvent. One of the more severe forms of insolvency (in comparison to other options such as administration) is liquidation, whereby the company is officially dissolved and no longer operates.
Liquidation does have its positives, however – this form of insolvency prevents further legal action being taken against you, and directors and/or shareholders can purchase the company’s assets at a fair value if they plan to use them in another business going forward. It also provides a clean break for Directors who are ready for their next business opportunity and can learn from the mistakes they made this time around.
If you think your business is headed in this direction, it’s important to know what will happen during the process, which is broken down below.
1. Appointing a liquidator
In order to liquidate your business, you will need to appoint a qualified liquidator. After an initial meeting where they gain an understanding of your business and its current financial situation, they will determine which form of liquidation is the best for you – a CVL (Creditor’s Voluntary Liquidation), MVL (Member’s Voluntary Liquidation) or another process. For a full breakdown of the different forms of liquidation, check out ‘How to liquidate a limited company – Our Expert Guide’ from the Insolvency Experts.
If the Directors of the business, either yourself or your colleagues, are intent on closing the business for good, then a Company Liquidation will take place. The powers of the Directors cease and the liquidator has full control over the company’s affairs.
2. Investigation begins
The liquidator will collect all of the information they need, such as books, records, non-physical assets, details of all company assets, and cash and book debts. This will build a picture of the situation you are in and what actions should be taken next.
The Directors are required to provide a full list of creditors with details such as names, business addresses, exact amount owed and reference numbers. This will help the liquidator to determine who should be paid and in what order.
3. Creditors will be informed
The liquidator will issue a formal notice to your creditors, explaining that you are going into liquidation and when they can expect to be paid.
4. Asset valuation
Based on the list of assets they collected during the investigation process, liquidators will then take the time to value every single asset that the business owes. From this final sum, the cost of the liquidators is deducted, voluntary liquidation costs are too, and then all other creditors are paid in their designated order until all of the money has been used up.
5. Staff are managed
During the liquidation process, all staff are made redundant. The liquidators are responsible for this, as well as dealing with any employee claims. They will also investigate the conduct of the Directors. If it is found that the Directors passed the point where they recognise they have cash flow problems and should have sought advice, they can be held personally liable and can be seen as wrongfully trading. In extreme cases, they are disqualified from being a Director for up to 15 years and become personally liable for a percentage of the debts of the company.
This has changed slightly as a result of the pandemic, however – many business owners have been hanging on when they have cash flow problems in hopes of Government support, which of course has been plentiful over the past 12 months. There are currently restrictions on running claims for wrongful trading during the COVID period. The liquidator will, however, see how the business was performing pre-COVID to make sure you were not essentially ‘kicking the can down the road’. Because of this, Insolvency Experts predict that there will be a huge number of wrongful trading claims in 12 months’ time.
Overall, the liquidation process should take around three weeks depending on the type of liquidation that is taking place. This can be as quick as just seven days if 90% of the company shareholders have supplied sufficient evidence as well as everything that is needed to liquidate the business. This is why preparation is absolutely essential to carry out a smooth liquidation process.