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I'm Scared of Liquidation - Should I be?

First Off - What is Liquidation?

Liquidation is when a company is closed and the assets are redistributed to cover costs; this process is also known as winding-up the company.

After liquidation has occurred, the company will no longer be able to employ people or carry on doing business. The company will cease to exist after it has been removed from the Company Register.

Any money left from the sale of assets can be used to pay shareholders, with any money left after this going to the state.

The Types of Liquidation

There are three types of liquidation:

  • Creditors' voluntary liquidation.
  • Members' voluntary liquidation.
  • Compulsory liquidation.

Creditor's Voluntary Liquidation
This is where you and your shareholders agree that the company cannot pay its debts and you decide to wind-up the company.

To carry out liquidation in this way, you should first call a meeting of shareholders and ask them to vote. 75% of shareholders (by value of share) must agree to the winding-up in order to pass a "winding-up resolution". Once you have made this resolution you must follow these steps:

  1. Appoint an authorised insolvency practitioner as liquidator to take charge of liquidating the company (this handy tool from gov.uk can help you find an insolvency practitioner)
  2. Send the resolution to Companies House within 15 days.
  3. Advertise the resolution in The Gazette.
  4. Next you need to hold a creditors meeting. This needs to be done within 14 days of the winding-up resolution. At least one of the following must be there:
    • another director
    • the company secretary
    • the liquidator

You must tell the creditors about the meeting at least 7 days before it happens and advertise it in The Gazette. At this meeting your creditors can question the directors about the failure of the company and they can also suggest an alternative liquidator.

Here you will present the Statement of Affairs. This will give details about the company's situation and assets. Use:

After the meeting, give the statement to the liquidator who will send it to Companies House or to the Accountant in Bankruptcy for companies in Scotland.

Member's Voluntary Liquidation
This is where your company can pay any debt but you wish to wind-up the company for another reason, such as retirement.

There are 6 steps you need to follow in order to liquidate in this way.

  1. Download a 'Declaration of solvency' (form 4.70) or, if your company is in Scotland, ask the Accountant in Bankruptcy for form 4.25 (Scot).
  2. Fill in the declaration - it must be signed by the majority of directors.
  3. Call a general meeting with shareholders at least 5 weeks later and pass a resolution for voluntary winding-up.
  4. Advertise the resolution in The Gazette within 14 days.
  5. Appoint an authorised insolvency practitioner as a liquidator who will take charge of winding-up the company.
  6. Send your signed form to Companies House or the Accountant in Bankruptcy (for Scottish companies), within 15 days of passing the resolution.

The Address for Companies House is as follows:

Companies House
Crown Way
Cardiff
CF14 3UZ

Compulsory Liquidation
This is where your company is unable to pay its debts and your creditors have applied to get the debt paid.

Your creditors can either:

  • Get a court judgement, or;
  • Get an official request for payment (a statutory demand)

You should seek advice from a solicitor or an insolvency practitioner if your company is in debt.

If your creditors have sent you a court judgement then you must do one of the following:

If you don't respond to the court judgment within 14 days, your creditors can apply to have your assets seized by a bailiff or sheriff.

If your assets are not worth the money owed, then your creditors can apply to have your company liquidated.

If your creditors have sent you a statutory demand then you must do one of the following within 21 days of receiving it:

  • Pay the debt.
  • Reach an agreement with the creditor to pay the debt in the future, e.g. by using a Company Voluntary Arrangement.
  • Apply to wind-up your company yourself.

If you do not do one of them then your creditors can apply to wind-up your company.

You can apply to the court to stop your creditors from applying to wind-up your company. You must do this within 21 days of getting the statutory demand.

To do this you will need to download and fill in application form 7.1A.

The court you apply to depends on how much money shareholders have paid into your company through buying shares.

If your paid up share capital is less than £120,000 then use the court finder to find a court dealing with insolvency. You must use the court nearest your company's registered office.

If your paid up share capital is more than £120,000 then you must apply to the High Court at the following address:

The High Court
Companies Court
7 Rolls Buildings
Fetter Lane
London
EC4A 1NL

You will then get a winding-up order.

What does a liquidator do?

  • They will take control of the business
  • Settle any legal disputes or outstanding contracts
  • Sell off the company's assets and use any money to pay creditors
  • Meet deadlines for paperwork and keep authorities informed
  • Pay liquidation costs and the final VAT bill
  • Bring creditors together and hold meetings, where necessary
  • Decide which creditors should be paid first
  • Interview the directors and report on what went wrong in the business
  • Get the company removed from the companies register

If you are going through Creditors' Voluntary Liquidation then the liquidator will act on behalf of the creditors and not the directors.

Speaking of Directors - What happens to them?

Once you have been liquidated you:

  • No longer have control of the company or anything it owns
  • Can't act for or on behalf of the company

If you're a director you must:

  • Give the liquidator all information about the company they ask for.
  • Hand over the company's assets, records and paperwork.
  • Allow the liquidator to interview you, if they ask to.

If you were a director of a company in Compulsory or Creditors' Voluntary Liquidation, you'll be banned for 5 years from forming, managing or promoting any business with the same or similar name to your liquidated company. The only exceptions to this are where:

  • The business is sold by a licensed insolvency practitioner giving the legally required notice
  • You get the court's permission to use the name
  • You're involved with another company (or other type of business) that's been using the same name as the liquidated company for at least a year

How to Access The Company Bank Account

Your company's bank account will be frozen when someone files a petition to wind-up the company. You will need a validation order to access it.

How to apply for a Validation Order

Tell the person who filed the winding-up petition you're applying for a validation order. You must also tell them what court you'll apply to (usually the Companies Court) and when you'll apply.

Fill in form 7.1A., write a witness statement and take the form and the statement to the court.

There is a fee of £155 that will need to be paid.

After you apply you'll be given a hearing on the same day or within the next few days. At the hearing, you present your case to a registrar or district judge and the respondent will present their case if they object to you getting a validation order.

At the end of the hearing you'll either:

  • Get a decision (you'll also get a written copy sent to you)
  • Be asked to attend another hearing if the court wants more evidence

You'll be given the validation order if your application is successful. You must give your bank a copy of this to access your company's bank account. If you don't agree with the decision you may be able to appeal to the Chancery Division of the High Court.

Conclusion

As you can see there are a few ways in which you can end up being liquidated. It can be a straightforward process (so long as you have agreeance with your shareholders) and you can be done within a matter of weeks. But for the most part, there should be no need to worry about it.

As always, with matters like this, it's usually best to seek professional advice relating to your situation. But hopefully, this post helps you understand the process.

All references to current legislation are correct at the time of writing, and should only be used as a guide. We recommend seeking professional advice before acting on the information in this article.

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