Company liquidation: the process and implications explained

Considering company liquidation is a challenging decision for any business owner. It’s not the kind of decision you’d ever have mapped into your business plan when you were first starting out, and it’s understandably one of the toughest moments a business leader can face.

Whether it’s due to unforeseen circumstances, irretrievably tough trading conditions, or a shift in your life’s path, the mere thought of liquidating your business can be overwhelming. But, understanding the process and taking the right steps can help ease the burden.

We’re here to guide you through the process – from understanding the different types and reasons to the intricacies of the legal procedures and the implications for you, your staff, and your stakeholders.  We can also assist in case you’d like to get pricing quotes for liquidation services.

We’ll simplify the jargon, clarify the hard stuff, and help you navigate this path in the best way possible.

What is company liquidation?

Company liquidation occurs when a business is unable to pay off its debts and is forced to cease its operations. 

There are various reasons why a company may go into liquidation. These can include financial difficulties, pressures caused by the challenging economy, insolvency, or simply because the business is no longer viable. 

When a company enters liquidation, its assets are sold, and the proceeds are used to pay off the creditors.

There are generally two types of liquidation:

1. Voluntary liquidation: this occurs when the company’s shareholders decide to wind up the business voluntarily due to financial troubles or other reasons.
2. Compulsory liquidation: in this case, the company is forced into liquidation by a court order, usually initiated by creditors who are owed money.

How does company liquidation work?

Company liquidation is a structured process through which a business closes down its operations. 

The decision to liquidate the company is typically made by the company’s directors or shareholders when the business is no longer financially viable or sustainable. This could be due to mounting debts, lack of profitability, or any number of other reasons.

It first involves appointing a liquidator. This is a licensed insolvency practitioner who takes control of the company’s affairs.

The company’s assets, including property, equipment, and inventory, are then sold off to generate funds. These funds are then used to settle outstanding debts, prioritising creditors according to specific legal guidelines. 

If there are any remaining funds after satisfying the debts, they may be distributed to the company’s shareholders. 

This process aims to wind down the business in an orderly fashion, while ensuring that creditors are fairly treated and all legal requirements are met.

How to liquidate a company

Here are the steps you need to follow in order to liquidate your company:

Step 1: Appoint a liquidator

Appointing a liquidator is a crucial step in the process of company liquidation. Finding the right professional can make a significant difference – we have a handy quote-finding tool you can use to compare costs on liquidation services, as a starting point. 

Start by researching licensed insolvency practitioners who have experience and a good track record in handling liquidations. Look for someone who is approachable and understands the unique challenges your business is facing. 

When reaching out to potential liquidators, don’t hesitate to ask about their past cases, qualifications, and fees. 

It’s important to establish clear communication from the beginning and ensure they are transparent about their role, responsibilities, and the steps involved. 

Choosing a liquidator who combines expertise with a supportive approach can help make the liquidation process more manageable and less overwhelming for everyone involved.

Step 2: Value and sell your assets

The company’s assets, including property, equipment, inventory, and any intellectual property, will at this point be evaluated and then sold. 

Step 3: Settle your debts

Once a liquidator is appointed, they take on the responsibility of interacting with the company’s creditors to keep them in the loop about the ongoing liquidation journey. 

Creditors (those who the company owes money to) play a significant role in this process. They have the opportunity to submit their claims to the liquidator, stating the amount they are owed. 

As the liquidation continues, money is generated from selling the company’s assets. The liquidator then uses these funds to settle creditor claims, trying to cover as much of the debts as possible. 

Most importantly, the liquidator follows a specific order of priority, guided by insolvency laws, to ensure fairness and transparency while handling the repayment of debts.

Step 4: Distribute the remaining funds to shareholders

If there are remaining funds after paying off all debts and expenses, these funds are distributed to the company’s shareholders according to their ownership percentages.

Step 5: Close the company

Once all assets have been sold, debts settled, and distributions made, the liquidator prepares a final report for the relevant (government) authorities, indicating that the company’s affairs have been wound up. 

The company is then officially dissolved and removed from the Companies House register. 

Company liquidation costs

Liquidating a company involves several costs that need to be considered. Here are some potential costs associated with company liquidation:

• Liquidator’s fees: one of the primary costs is the fee charged by the appointed liquidator for their professional services. Liquidators charge fees based on the complexity of the liquidation, the size of the company, the number of assets to be sold, and the overall work involved in managing the process.
• Legal and professional fees: you might need to hire legal and financial professionals to assist with various aspects of the liquidation, such as drafting legal documents, handling tax matters, and ensuring the process complies with relevant laws and regulations.
• Asset valuation costs: valuing and appraising the company’s assets for sale can incur expenses. This is important for determining the fair market value of the assets and securing the best possible prices during the asset sale.
• Advertising and marketing expenses: when selling the company’s assets, there might be costs associated with advertising and marketing to attract potential buyers. This could include online listings, auction fees, and other promotional expenses.
• Creditor and stakeholder communication costs: keeping creditors, shareholders, and other stakeholders informed throughout the liquidation process can involve communication expenses, such as postage, legal notices, and administrative costs.
• Debts and liabilities: liquidating a company involves settling outstanding debts and liabilities. These could include payment to creditors, outstanding employee wages, taxes owed, and any legal obligations the company has.
• Disposal costs: selling the company’s assets might incur additional costs related to transportation, storage, and preparation for sale, depending on the nature of the assets.
• Administrative costs: liquidation involves various administrative tasks, such as closing business bank accounts, notifying government agencies over the phone, and updating records. These tasks can lead to administrative expenses.
• Unforeseen costs: depending on the specific circumstances of the company, there might be unforeseen costs that arise during the liquidation process. These could include legal disputes, unexpected tax issues, or other complications – so it’s always a good idea to try and have some additional funds on hand to deal with these in the worst-case scenario.

Company liquidation with HMRC

Her Majesty’s Revenue and Customs (HMRC) plays a significant role in the liquidation process. 

HMRC’s involvement ensures that taxes owed by the company are properly addressed. Here’s how HMRC is involved in the liquidation process:

• Debts to HMRC: if a company owes taxes, such as VAT, PAYE (Pay As You Earn) income tax, or corporation tax to HMRC, these debts are considered priority claims in the liquidation process. This means that they are given higher importance when distributing the available funds to creditors. HMRC’s status as a priority creditor ensures that they are more likely to recover a portion of the owed taxes.
• Proof of debt: HMRC, like other creditors, submits a claim for the money owed to them by the company. This claim outlines the amount of taxes the company owes. The liquidator reviews these claims and verifies their accuracy.
• Communication and cooperation: The liquidator communicates with HMRC to provide updates on the progress of the liquidation and the financial situation of the company. HMRC may also engage with the liquidator to resolve any outstanding tax issues or disputes.
• Tax investigations: HMRC might conduct investigations or audits to ensure that the company’s tax affairs are in order before the liquidation is finalised. This helps prevent any potential tax evasion or fraud that could impact the distribution of assets to creditors.
• Clearance certificate: In some cases, HMRC may issue a “clearance certificate” which confirms that all tax matters have been settled and cleared for the company’s liquidation to proceed. This can provide reassurance to the liquidator and potential buyers of the company’s assets.

Consequences of liquidation

As a business owner, you may face additional challenges during and after the liquidation process:

• Your credit rating can be affected. With a limited company, your personal credit rating is usually protected – that is, unless personal guarantees are involved.
• Personal assets are protected in a limited company, but there can be exceptions.
• Liquidation can affect your ability to start a new business in the future. It leaves a mark on your credit history, making it harder to secure loans or funding, and potentially subjecting you to certain restrictions depending on the circumstances of the previous business’s closure.

Liquidation can also have significant implications for various parties involved:

• Stakeholders such as customers, suppliers, and other business partners will be affected by the company’s liquidation.
• Creditors may not receive full payment for outstanding debts, depending on the available funds.
• Employees will face job losses as the company ceases operations.
• Shareholders may lose their investment if there are no funds left after paying off debts.

Liquidation versus administration

Liquidation and administration are different processes. Liquidation is the winding-up of a company that will cease operations, while administration aims to rescue the company from insolvency. 

There are numerous examples of big UK brands that have gone into administration in recent years, caused by the challenges of COVID, the cost of living crisis and the pressures on high street retail caused by ecommerce. 

Some of these businesses were forced to close down all their store locations and go online only. Others had their brand IP purchased and sold through another parent company. And, some were able to continue trading but with a limited number of locations. 

These examples show how administration is quite different to liquidation. Deciding which of the two avenues to pursue depends on the company’s financial situation, and the objectives of stakeholders.

Alternatives to liquidation

If liquidation is not the right option for your company, consider these alternatives:

• Administration: As explained above, company administration aims to rescue a company or brand and return it to profitability, with the process overseen by administrators until a purchaser arises. Ultimately, the decision between liquidation and administration hinges on the feasibility of rescuing the business, the value of its assets, the potential for creditor satisfaction, and your vision for the future. Seeking professional advice from insolvency practitioners, financial advisors, and legal experts is crucial. They can assess your company’s situation, outline the potential outcomes of each option, and guide you toward the most suitable choice. Remember, making an informed decision with a clear understanding of the implications is vital for both your business and all stakeholders involved.
• Dormant company: If the company is not trading actively, it can be kept as a dormant company. Dormant status is ideal if you plan to restart your business in the future, and want to maintain ownership of your intellectual property.
• Creditor or companies’ voluntary arrangement: this is a formal agreement between the company and its creditors to repay debts over time.
• Mezzanine finance: mezzanine finance can potentially be an alternative to company liquidation, as it provides an alternative way for struggling businesses to secure additional capital without resorting to shutting down. Mezzanine finance comes with its own set of terms and conditions, however. These typically include higher interest rates from lenders. If you’re considering this option, carefully weigh the benefits and risks before taking on additional debt.

Conclusion

Facing company liquidation is undoubtedly a tough situation, but exploring the available options, understanding the implications, and making informed decisions can help mitigate the impact on all stakeholders. 

Remember, you’re not alone – many businesses have navigated this process, and with the right support, you can find the best path forward for your company.