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UK Insolvency Advice - Liquidation
This liquidation FAQ (frequently asked questions) explains how a liquidation works under the Insolvency Act 1986 in England and Wales.
What is Liquidation ?
A company is a legal entity and it is a different legal person from it directors and shareholders. A company "dies" when it is dissolved and is no longer on the register of companies. The most important method of dissolving a company is through a liquidation. A liquidation is final and the company will not be in existence after the liquidation comes to an end.
What types of liquidations are available ?
There are three types of liquidation available
- Members/Shareholders voluntary liquidation (MVL)
- Creditors voluntary liquidation (CVL)
- Compulsory Liquidation
The shareholders voluntary liquidation is where a company goes into liquidation but it expects to pay all its creditors, employees, taxes and also pay the shareholders part, all or more than their ordinary capital. An insolvency practitioner is appointed by the members over the affairs of the company as liquidator.
The creditors voluntary liquidation is where a company is insolvent i.e. it cannot pay its debts as and when they fall due and is forced into liquidation. An insolvency practitioner is appointed liquidator by the members/creditors.
A Compulsory Liquidation is where a company is forced into liquidation by one of its creditors (for not payment of debts) or the Secretary of State appoints a liquidator over the affairs of the company.
When are the different types of liquidation used ?
The member/shareholders liquidation (where all creditors will be paid in full) is used generally to re-organise assets, group of companies, or to release capital. International Corporations have thousands of companies that have been created to deal with certain business. If that part of their business has been re-organised the company that owned it has to go. A members liquidation is the normal way of restructuring companies, assets etc.
The creditors liquidation (where a company is insolvent) is generally forced upon the company as it can not continue to trade either because the directors believe that they cannot continue or a receiver was appointed over the assets of the company or a creditor sued the company for his/her money.
What happens when a company is in liquidation ?
A company is in liquidation when a liquidator is appointed over the affairs of the company. The appointment of the liquidator has the effect of removing the directors from office and the liquidator is the authorised person who can deal with the assets, liabilities, bank account and employees of the company. After the appointment of the liquidator the directors cannot bind the company. Only the liquidator and the persons specifically authorised by him can bind the company.
Who can be liquidator ?
The Insolvency Act 1986 specifies that a person in order to be a liquidator has to be authorised by the Department of Trade and Industry (DTI). The authorisation process however is handled mainly by the Accountancy and Legal Bodies (Institute of Chartered Accountants, Law Society, Association of Certified Accountants etc.).
The liquidator must have suitable indemnity (insurance cover) and must follow ethical, technical and other recommendations adopted by his Professional Body, or by the DTI. There are currently about 2000 Insolvency Professionals who can be appointed as liquidators.
Who appoints the liquidator ?
The liquidator is appointed by the following persons.
- Member/shareholders of the company
- Creditors of the company
- The Secretary of State
In the creditors liquidation where a liquidator was appointed by the members and the creditors appointed a different liquidator in a subsequent meeting the creditors liquidator has precedence over the members liquidator.
Who can take the company into liquidation ?
A company can go into liquidation by the members of the company, the creditors of the company, or by the DTI.
What is the most common method of liquidation ?
With the introduction of the Insolvency Act 1986 the most common method of liquidation is the voluntary liquidation either member or creditors.
What is a Members Voluntary Liquidation ?
A members voluntary liquidation implies that the shareholders would get their capital or the assets that the company owns will be disposed. This has taxation implications.(Income Tax and Capital Gains Tax) Professional advice is therefore required from your accountant regarding the tax position of the company and the tax position of the individual shareholders.
What is a Compulsory Liquidation (Court) ?
Where a creditor proceeds against a company to realise his debt and the company is unable to pay its debt the company is would up by the court. The creditor must be owed more than £750 and he must have given 21 days notice to the company through a statutory demand.
If the company is wound up by the court the liquidator is the Official Receiver a government employee. If the company has assets the Official receiver calls for a creditors meeting at which meeting an Insolvency Practitioner is appointed liquidator, to realise the assets and then distribute the proceeds to the creditors.
What is a Creditors Voluntary Liquidation ?
A creditors voluntary liquidation is a liquidation where the company is insolvent i.e. it can not pay its creditors.
The directors pass a resolution that the company can not continue to trade and call for a members and creditors meetings to be held. The meetings decide upon the liquidator, liquidation committee and other relevant matters specific to the company, and the company goes into liquidation.
The documents required to be produced at the members and creditors meetings are the Statement of Affairs (detailing assets and liabilities), A deficiency account, Statutory information, and history of the company with an explanation of the deficiency and the reasons for failure. The creditors can request further explanations if they so wish.
In most cases the directors are assisted by an Insolvency Practitioner in preparing the above statements and generally organises the meeting, letters, notices, advertising, etc.
Who is the chairman of the creditors meeting?
The Chairman of the meeting of creditors/members is always a director of the company.
What happens at the creditors meeting?
At the creditors meeting the statement of affairs, history and explanations are produced at the meeting, and explanations are given on specific matters.
It is customary for the chairman of the meeting to answer questions from the creditors present regarding the affairs of the company. The formal part of the meeting is to appoint an Insolvency Professional as liquidator of the company and the appointment of a liquidation committee. This is done by voting by value of debt. Persons that have security and wish to vote at the meeting they must either relinquish their security or value their security and vote only for the unsecured part.
Is my salary / benefits going to be paid ?
Certain debts are paid by the Department of Employment if the employer is insolvent . The debts are as follows:
- Arrears of pay for up to eight weeks and to a maximum of £210 a week;
- Holiday pay for a period or periods up to six weeks in all and to a maximum of £210 a week
- Payment for notice given as for an employer's failure to give proper notice based on the employee's statutory minimum entitlement to notice under the Act. Claims are payable up to a maximum of £210 a week.
- Any basic award of compensation for unfair dismissal made by an industrial tribunal.
- Reasonable reimbursement of any fee or premium paid by or for an apprentice or articled clerk
What classes of creditors are there?
The Insolvency Act 1986 defines various classes of creditors.
- Secured Creditors
These are debts which are specifically charged to a creditor i.e. a mortgage loan by a bank, a loan by hire purchase/finance company etc. A Secured Creditor will rely on his security. - Reservation of Title
These are debts where the asset that the company purchased from the creditor does not belong to the company unless fully paid. These creditors can claim their assets after they prove their debt to the liquidator. - Debts Subject to Lien
Preferential Debts
These are debts which are unsecured but they will be paid in preference to the unsecured non preferential debts (PAYE, VAT, Employment regulation payments etc.). - Floating Charge
Unsecured non Preferential
Unsecured creditors are ordinary creditors which are neither secured nor preferential.
What is a liquidation committee?
The liquidation committee is a Committee of creditors with a minimum number of 3 and a maximum of 5 who receive information from the liquidator and sanction his actions.
Can I expect a Dividend?
Creditors are paid from any surplus in an insolvency procedure in a certain order of priority.
- Fixed Charge Holders
Fixed charge holders such as the Bank who have Mortgages over properties, Debentures over book debts, Hire-purchase companies who have financed vehicles and equipment.The fixed charge holders are paid first, out of the proceeds from the sale of the assets, which they have a charge after the costs of realisation - Preferentail Creditors
The next group of creditors to be paid from a surplus are the preferential creditors, who are Customs & Excise for Value Added Tax, Inland Revenue, National Insurance and employees arrears of wages and holiday pay. - Floating Charge Holders
The next group of creditors to be paid from the surplus are the floating charge holders, who will have a charge over the floating assets such as stocks and work-in-progress. - Unsecured Creditors
All other creditors are unsecured and they will only receive a dividend from a surplus after the first three classes of creditor have been satisfied in full - Shareholders
The shareholders are last in line for any dividend, which will only be paid to them once the first four classes of creditor have been paid in full.
What are the duties of the liquidator?
The main duty of the liquidator is to realise the assets of the company and pay its creditors a dividend if funds are available.
Another important aspect of the liquidation work is to investigate the company's affairs and recover any assets that are missing, or have been transferred at undervalue out of the company. These transactions can be reversed by the liquidator.
He must also report on the directors conduct to the Department of Trade and Industry. This report is privileged between the liquidator and the DTI.
Disclaimer: This material is for general information only. You should not rely on this information to make any decisions. Call us for professional advice for your own particular situation.
See also Abccus Finance: Free Debt Management for more information on how to tackle problem debts.