What Happens If Company Goes Into Liquidation – When an insolvent company goes into liquidation, its assets and liabilities are dealt with before it is dissolved and struck off the Company Register.
Thousands of businesses in the UK go into liquidation each year, with many more heading down this route due to the covid-19 pandemic, which has hit many businesses hard.
What Happens If Company Goes Into Liquidation
If you’re considering liquidating your company in 2021, Clarke Bell has produced this guide outlining what happens and who gets paid first when a company goes into liquidation.
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(We’re talking insolvency liquidations here, as opposed to solvent liquidations – also known as Member Voluntary Liquidations (MVLs) – details of which can be found here.)
Before looking at who gets paid first when a company goes into liquidation, let’s outline what the process involves.
Liquidation is a formal way of closing a company. Liquidation is a legal process and therefore requires the appointment of an insolvency practitioner to oversee the process.
It is worth noting that the government recently announced that it has extended its winding-up petition moratorium until September 30, 2021, due to the continued disruptions of the covid-19 pandemic.
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These temporary measures mean that creditors cannot make a winding-up application to the courts during the relevant period, which now applies to 1
A winding-up petition can only be approved if the creditor has reason to believe that the pandemic has not caused disruption to the company.
The Insolvency Act 1986 sets out an order of payment which determines who will be entitled to the first payment when a company goes into liquidation.
Each creditor named in the law must be paid the full amount owed before more funds are then allocated to the next creditor down the hierarchy.
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The first parties to be paid when a company goes into liquidation are secured creditors with a fixed charge. This usually refers to bodies such as banks or other creditors.
Secured creditors refer to those who have a legal right or title to the property. This can include everything from business equipment, brick and mortar properties, cars to vehicles.
Next are the costs associated with the liquidation process, which will have to be paid to the insolvency practitioner. This includes Insolvency Practitioner fees as well as associated payments and VAT.
Preferred creditors are to be paid. These relate to staff members who are entitled to statutory payments. Here, staff members are paid in arrears of wages. As well as any holiday pay due and any unpaid pension contributions.
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From 1 December 2020, HMRC moved up the rankings to become a preferred secondary creditor – in respect of certain taxes (eg VAT and PAYE), other taxes (eg corporation tax) remaining unsecured.
As HMRC is normally one of the biggest creditors, their move up the rankings has had a knock-on effect on the amounts received by those creditors below them here.
Next up are secured lenders with a floating fee. This refers to those who have security over assets such as stock, fixtures and fittings (unless purchased from finance in which case it would be a fixed charge asset), work in progress or raw materials.
These floating charge creditors get paid after the preferred creditors and at this stage an amount of money known as the prescribed portion is set aside for the unsecured creditors.
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The prescribed part applies to floating charge assets taken out after 15 September 2003. This is intended to help unsecured creditors obtain some form of payment from the liquidation.
Then the unsecured creditors are paid. Unsecured creditors typically refer to customers, suppliers, contractors and HMRC (in relation to taxes such as corporation tax).
Ultimately, the company’s shareholders are the last group to get paid. This means that creditors always have priority over the company’s shareholders.
A business director who fails to put the interests of creditors ahead of shareholders in an insolvency case can face serious consequences, including disqualification.
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If your company is experiencing financial difficulties and is considering liquidation through a CVL, Clarke Bell is here to help.
Our team has over 28 years of experience. During this time, we have helped thousands of business executives across the country find the best solution for their particular situation.
If your company is in trouble and you want to look for options to turn it around, we can help advise and implement the best way to save the business. Whether it is through administration or a voluntary company arrangement.
We will work closely with you to understand your situation and find the best way forward. To see how we can help, simply get in touch today to speak to one of our expert team.
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If you’re concerned about your business or just want a (free) no-obligation chat, contact Clarke Bell on 0161 907 4044 or [email protected] today. Our licensed insolvency practitioners will give you the best professional advice for your situation.
If your company is registered in Scotland or Northern Ireland, we will not be able to liquidate your company. However, we can refer you to someone who can.
We distributed over £545 million in cash to the company’s shareholders in over 2,870 MVL. ✓ 27+ years of experience ✓ Nationwide services ✓ Fully regulated liquidation is a formal insolvency procedure that brings an unwanted or insolvent company to an end. There are three main types of liquidation and the one chosen will depend primarily on the financial position of the company at the time of liquidation. An MVL is intended for solvent companies, while a CVL is used when a company is insolvent. Also, companies can be compulsorily liquidated in certain cases.
In its simplest form, liquidation is a formal process that leads to the closure of a limited liability company. As part of the process, all of the company’s assets will be sold – or ‘liquidated’ – for the benefit of outstanding creditors and/or shareholders before the company is struck off – or wound up – from the register held at Companies House. Once this has happened, the company will cease to exist as a legal entity. Any outstanding debts owed by the company will be written off, unless the director has personally guaranteed these loans.
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If you are considering liquidating your limited company, the first thing to understand is that there are several ways in which a company can be liquidated.
There are three main types of liquidation, and although they all attempt to achieve the same end result – that is, the formal closure of the company – each process is distinct. The procedure used to put the company into liquidation depends mainly on its financial position at the time.
A company can be liquidated regardless of whether it is solvent or insolvent. For solvent companies, this is done through a Members’ Voluntary Liquidation (MVL), while insolvent companies are wound up either through a Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation (WUC).
1. Creditors’ Voluntary Liquidation (CVL) – A CVL is initiated by company directors when it becomes clear that the company concerned is insolvent and the chances of affecting a successful turnaround are low. Although this is a voluntary process, a CVL is usually only entered into when there are few other alternatives open to the company. Creditors’ voluntary winding up is often triggered by a fall in the company’s cash flow, and directors should take early advice if they are facing problems such as the loss of a client or key contract, tax arrears with HMRC or being unable to refund rejection. loan back; all the typical warning signs of a company in financial difficulty.
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To start the process of placing the company into voluntary liquidation, the directors and/or shareholders must appoint a licensed insolvency practitioner who will take control of the company and ensure that its affairs are wound up in an orderly manner.
As this is a voluntary process, the directors can appoint an insolvency practitioner of their choice and have some control over when the winding up process starts. The directors will also be responsible for paying the insolvency practitioner’s fees for managing the liquidation. In many cases these fees will be taken from the assets of the company, however if there are insufficient assets available then the directors will have to make up the shortfall personally using personal funds. Directors may have the right to seek redundancy if their company becomes insolvent, which can be a valuable lifeline at a time when personal funds are likely to be tight.
Don’t worry – There are thousands of other business executives going through the same process. Whatever position you’re in and need to look for options, speak to a member of the Real Business Rescue team. It’s free and confidential.
Deciding to voluntarily place your company in the hands of a liquidator can also ensure that you are acting responsibly as a director of a company that has found itself in an insolvent position.
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As a director of a limited company, you have a number of legal obligations to comply with once you know that your company is insolvent. One of these is putting the interests of your creditors above those of the company and its shareholders. Essentially, that means you should
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