What happens when a company goes into liquidation?

What happens when a company goes into liquidation depends on whether it’s a solvent process or an insolvent process. In both cases, a licensed insolvency practitioner is appointed as liquidator. They take control of the company, deal with its assets, settle what’s owed (if assets permit), and close the business down. In a solvent liquidation, the remaining funds are then distributed to shareholders.

What is liquidation?

Liquidation is the formal process of closing a limited company. The company ceases trading, its assets are realised, its debts are settled, and it is eventually dissolved and removed from the Companies House register.

What liquidation means for a company depends on its financial position. If the company is insolvent, liquidation is typically used to close it down in an orderly manner and distribute its assets to creditors. If the company is solvent, liquidation can be used to close the business tax-efficiently and return funds to shareholders.

In both cases, the company ceases to exist once the process is complete.

If you’d like a confidential, no-obligation chat to better understand what liquidation is and what does liquidation mean in business, contact our experts today.

How does liquidation work?

Liquidation works in stages, and there’s a clear liquidation process that’s followed. In a voluntary liquidation, the process starts with the directors deciding to close the company and instructing a licensed insolvency practitioner. The IP assesses the financial situation, confirms the right process, and handles the formal paperwork to start the liquidation.

Once the liquidator is officially appointed, directors hand over control of the business to them. The company usually stops trading, and staff are made redundant. The liquidator then sells any assets, collects money owed to the company, and, where possible, pays creditors. Understanding what happens in liquidation and how liquidation works beforehand can make the process less daunting and help you better prepare for each stage.

What does a liquidator do?

A liquidator is a licensed insolvency practitioner; they’re appointed to manage the whole liquidation and company closure process. Their role includes:

• Taking control of the company’s assets and affairs.
• Investigating the company’s financial history and the conduct of its directors.
• Selling assets and collecting any money owed to the company.
• Paying creditors in the order of priority set out in law.
• Dealing with employee claims for redundancy and unpaid wages.
• Submitting a report on director conduct to the Insolvency Service.
• Dissolving the company once the process is complete.

To better understand what happens when liquidators are appointed and what they do in the process, we’ve put together an insolvency practitioner guide.

Types of liquidation

There are three main types of liquidation in the UK. Which one applies to your company will depend on whether it’s solvent or insolvent.

Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation (CVL) is an insolvent liquidation started by the company’s directors and shareholders. This process is the most common form of liquidation for insolvent companies. It gives directors control over the process and timing, and is generally preferable to waiting for a creditor to force the issue through the courts. 

Acting early and getting advice as soon as you realise the business is becoming insolvent is important, as the liquidator will report on directors’ conduct to the Insolvency Service. They’ll consider how quickly a director sought advice once insolvency became apparent as part of that review.

Members’ Voluntary Liquidation (MVL)

A Members’ Voluntary Liquidation (MVL) is used to close a solvent company and is available to companies with net assets of over £25,000 once all debts have been paid. It’s a popular route if directors want to retire, the business has served its purpose, or the shareholders want to extract retained profits in a tax-efficient way.

Some businesses may be eligible for Business Asset Disposal Relief (formerly Entrepreneurs’ Tax Relief), which can reduce the tax rate on distributions to 18%. This can represent a significant saving compared to taking the money as dividends. Your accountant can advise whether you qualify for this.

Compulsory liquidation

Compulsory liquidation is a court-driven process, usually started by a creditor owed £750 or more for an undisputed debt. The creditor presents a winding-up petition to the court. If the petition is successful, the court places the company into compulsory liquidation and the Official Receiver, a government civil servant, is appointed as liquidator. 

Compulsory liquidation vs voluntary liquidation

A key difference between compulsory liquidation and voluntary liquidation is who starts the process.

Compulsory liquidation is a liquidation process that’s forced by a court, usually after a creditor presents a winding-up petition because the company cannot pay its debts. The court appoints an Official Receiver to act as liquidator, though a licensed insolvency practitioner may take over if creditors choose one.

Voluntary liquidation is started by the company’s directors and shareholders. There are two types: a Creditors’ Voluntary Liquidation (CVL) for insolvent companies, and a Members’ Voluntary Liquidation (MVL) for solvent companies.

Why liquidate a company?

Although no two liquidations are the same, these are some of the most common reasons directors choose to liquidate a company:

• The company is insolvent and cannot pay its debts, making a CVL the most appropriate route.
• The company is solvent, but the director wants to retire or start a new venture, making an MVL a tax-efficient way to close.
• A creditor has threatened to issue or has issued a winding-up petition, and the director wants to take control of the process before the courts do.
• The company has served its purpose. 

How much does liquidation cost?

The cost of liquidation depends on the type of procedure and the complexity of the case.

At the Liquidation Centre, the cost of a CVL typically starts from around £3,000 plus VAT. The cost of an MVL can start at £1,499, and administration tends to be more expensive given the volume of work involved.

In most cases, the liquidator’s fees are paid from the company’s assets, so directors don’t need to fund the process themselves. If there are no assets, other arrangements may be possible and should be discussed upfront.

Any reputable insolvency practitioner will give you a clear fee structure before you commit to anything. If you can’t get a straight answer on costs before beginning the process, then that’s a sign to look elsewhere.

What happens to employees when a company goes into liquidation?

When a company goes into liquidation, employees are typically made redundant. The liquidator will notify employees, and they will be entitled to claim certain payments through the government’s Redundancy Payments Service, including:

• Statutory redundancy pay
• Unpaid wages (up to eight weeks)
• Holiday pay owed
• Notice pay
  

These payments are made from the National Insurance Fund where the company cannot cover them, up to the statutory limits. Employees rank as preferential creditors for certain claims, meaning they are prioritised ahead of unsecured creditors in the distribution of assets.

If you’re a director who’s also employed by the company and on the payroll, you may be entitled to claim redundancy pay and other entitlements, subject to meeting the eligibility criteria.

How long does the liquidation process take?

How long the liquidation process takes will depend on the complexity and type of liquidation. A straightforward CVL with minimal assets and creditors can be completed in around 6 to 12 months. 

More complex cases involving significant assets, ongoing investigations, or disputes with creditors will take longer. An MVL can often be completed more quickly, within 3 to 12 months. 

The factors that could extend either process include:

• Ongoing legal disputes.
• Assets that are difficult to sell.
• Investigations into director conduct.
• Creditor claims that need to be resolved before the company can be dissolved.

Do I need a liquidator to close my company?

If your company is solvent and has no significant assets or liabilities, you may be able to close it through a voluntary strike-off by filing a DS01 form with Companies House. This can be a simpler and cheaper process, but is only available to companies that meet certain conditions, and striking off an insolvent company is not a straightforward alternative to liquidation. 

Creditors can apply to have the company restored to the register and placed into compulsory liquidation. Directors of dissolved companies can still be investigated, disqualified, and issued with compensation orders by the Insolvency Service.

If your company is insolvent, or if you want to release funds in a tax-efficient way, you will need a licensed liquidator. A CVL and an MVL both require a licensed insolvency practitioner to be appointed; you cannot carry out either process without one.

If you’re unsure which route is right for your company, speaking to a liquidation expert will help you understand your options before you commit to anything.

How the Liquidation Centre can help with company liquidation

The Liquidation Centre is one of the UK’s leading providers of company liquidation services. Our licensed insolvency practitioners handle CVLs and MVLs for directors across the UK every day.

Whether your company is insolvent or you’re ready to close a solvent business, we’ll give you clear advice on your options. If you’re not sure which option is right, call us for a free, confidential consultation.