What is Liquidation?
Liquidation is a formal process whereby a liquidator is appointed to wind up the affairs of a company. All assets of the company are usually sold with the proceeds distributed to its creditors or shareholders following payment of the liquidator’s fees and any legal or other costs.
There are two types of insolvent liquidation; voluntary and compulsory. Below you can find further information on both types of liquidation, key things to consider and the impact on directors.
Voluntary liquidation is brought about when the directors and shareholders form a view that it is no longer possible for the company to keep trading as it is unable to pay its creditors as and when debts fall due. In other words, the business is insolvent.
The process for placing a company into voluntary liquidation is relatively straightforward. There is usually a meeting of the directors who will pass a resolution at Board level to appoint a liquidator. Usually, the directors and shareholders will have been in talks with a liquidator prior to the Board meeting taking place but, other than the appointment of a liquidator, no other formal process is required by the company.
Key things to Consider:
- Whilst the company is trading profitably, the directors’ duties are to the shareholders of the company however, once it is insolvent, the directors are under a duty to act in a manner which is in the best interests of creditors. If the directors take advice from an insolvency practitioner and make the decision to place the company into voluntary liquidation, rather than a creditor presenting a winding up petition, this is likely to assist them when the liquidator comes to investigate the directors’ conduct as it is clear the directors have taken action in order to protect the creditors.
- Voluntary liquidation is significantly quicker and is a far more personable experience for both the directors and the company’s employees.
- To an extent, the directors remain in control of when the company is placed in liquidation which allows them time to consider whether they wish to formally purchase the assets of the company to continue trading in another guise.
- The directors will often be able to assist the liquidator in recovering some of the company’s assets potentially meaning a better outcome for creditors.
This type of liquidation is forced upon a company by its creditors where one creditor has issued a Winding-up Petition, a Court hearing takes place, and the Court will confirm that the company must be wound up and placed in liquidation.
Either the Official Receiver or a qualified insolvency practitioner is appointed to act as liquidator and will then take steps to freeze the company’s assets and commence an investigation into how the company has found itself in an insolvent position. The liquidator’s role is the same as if the company had voluntarily entered liquidation in that the company’s assets are released with the proceeds being divided amongst the creditors following deduction of the cost of administering the liquidation.
Regardless of which of the two insolvent liquidations takes place, the liquidator is under a duty to investigate the conduct of the directors and file a report to the Insolvency Service who will consider whether disqualification proceedings should take place.
What this means for a director:
- Once the company is in liquidation and the liquidator investigates the directors’ conduct, the presence of a Winding-up Petition could be seen as an indication that the company was not being run effectively. The liquidator will scrutinise the directors’ conduct and, if it is found that the directors were acting in breach of their duties, they could find themselves personally liable for any debts that were incurred once they knew, or ought to have known, that the company was insolvent.
- The process of a compulsory liquidation takes far longer, is potentially more expensive, leaving less available funds for the general body of creditors.
- A compulsory liquidation is often a much more hostile process than if the company were to place themselves in voluntary liquidation.
It follows that, directors should always be mindful of their company’s financial position at all times and ensure that when there is even a hint of financial difficulty, they seek advice from a professional. The fact that they have taken advice will assist them with a defence if they are criticised once the liquidator has carried out investigations.
The Insolvency and Debt Recovery Team at Ellisons are here to assist directors in understanding their options when a company finds itself in financial difficulties. We can provide practical advice on the liquidation process and the obligations of directors prior to and during the liquidation process.