Liquidation is a formal process to close your limited company when it is unable to its debts in full. The process involves winding up the affairs of the company and distributing the assets to creditors. 

The liquidation process is overseen by an insolvency practitioner, who is responsible for collecting and selling the company’s assets, paying off creditors, and distributing any remaining funds to shareholders. Liquidation is typically the last resort for a struggling company but can provide a fresh start for the stakeholders. 

If you are considering liquidating your limited company, there are three ways to do it: Creditors’ Voluntary Liquidation (CVL) Compulsory Liquidation, and Member’s Voluntary Liquidation (MVL).

CVL (Creditors’ Voluntary Liquidation), is started by the company directors when there is no hope of company rescue or recovery. Usually, the company will be facing pressure or potential legal action from creditors and so will enter this process voluntarily to try and get the best return for creditors. 

Compulsory Liquidation occurs when a creditor forces the company into liquidation and petitions the court to wind-up the company. 

An MVL (Member’s voluntary liquidation) is a solvent liquidation, whereby the directors no longer want the company to continue trading and are choosing to close the company down. An insolvency practitioner will help distribute the assets among creditors and assets and close the company down.

  • What is liquidation?

    Liquidation occurs where a company’s assets are sold off in order to pay its debts and then the company is closed down. It is typically used when a company is insolvent, meaning it is unable to pay its debts as they fall due, or its liabilities exceed its assets.

    There are two main types of liquidation: voluntary liquidation and compulsory liquidation. In voluntary liquidation, the decision to liquidate the company is made by the company’s shareholders or directors, while in compulsory liquidation, the company is forced into liquidation by court order, typically at the request of one or more of the company’s creditors.

    Liquidation is a serious matter, and can have significant implications for the company’s shareholders, directors, and employees. It is typically seen as a last resort, when all other options for resolving the company’s financial difficulties have been exhausted.

  • How does liquidation work?

    Liquidation is a legal process by which a company’s assets are sold off to pay its creditors, and the company is then dissolved. The process typically involves the following steps:

    1. Appointment of a licensed insolvency practitioner to oversee the liquidation process
    2. Identification and valuation of assets, including tangible assets such as property, equipment and stock, as well as intangible assets such as intellectual property.
    3. Once the assets have been identified and valued, the liquidator will sell them off to raise funds to pay the company’s creditors.
    4. The funds raised from the sale of the assets are then used to pay the company’s creditors in a strict legal order of priority.
    5. Once all the company’s debts have been paid, any remaining funds are distributed to the shareholders in proportion to their shareholdings.
    6. Dissolution of the company: Once the liquidation process is complete, the company is dissolved and ceases to exist.
  • What happens to the assets of a company in liquidation?

    In a liquidation process, the assets of a company are sold off to pay its creditors. The proceeds from the sale are distributed among the creditors in a strict legal order of priority. The order of priority typically follows these rules:

    1. Secured creditors, such as banks and other lenders who hold a security interest in the company’s assets
    2. Preferential creditors, such as employees who are owed wages and benefits, are paid next
    3. Unsecured creditors, such as suppliers, trade creditors, and other parties are paid from the remaining proceeds
    4. Once all of the company’s debts have been paid, any remaining funds are distributed to the shareholders in proportion to their shareholdings.

    It is important to note that the liquidator has a legal duty to maximize the value of the company’s assets for the benefit of its creditors.

  • What happens to employees during liquidation?

    During a liquidation process, the fate of the employees depends on the circumstances of the liquidation, such as whether the company is insolvent or solvent, and whether it will continue to operate under new ownership or cease operations altogether.

    If the company is insolvent and has to cease trading, the employees are generally made redundant, meaning that they lose their jobs. In this case, the liquidator will work with the company to terminate employment contracts and arrange for final payments, including outstanding wages, holiday pay, and redundancy payments.

    In some cases, if the business is being sold as a going concern, the new owner may offer employment to some or all of the employees. This can happen if the new owner believes that the skills and experience of the existing workforce are valuable to the ongoing operation of the business.

  • Can a company be saved from liquidation?

    Yes, a company can be saved from liquidation in some cases. If a company is facing financial difficulties, there are various options available that may help it avoid liquidation, including:

    1. Restructuring
    2. Negotiating with creditors
    3. Refinancing
    4. Administration
    5. Company Voluntary Arrangement (CVA)

    Seeking advice from an insolvency practitioner or a financial advisor, can help a company identify the best course of action to avoid liquidation and improve its financial health.

    It is important to note that each situation is unique, and there is no one-size-fits-all solution. If a company is facing financial difficulties, seeking professional advice early can help to identify the best course of action and increase the chances of avoiding liquidation.

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