Liquidation is, essentially, the final option for an insolvent company. It involves selling all of the company’s assets, using the raised funds to pay creditors and then closing the company down.
When to consider liquidation
Liquidation is the final option for an insolvent company that is not viable. Before liquidation is contemplated all recovery options should be considered. Liquidation does, however, draw a line under company misfortunes and the concerns of directors. Liquidation can be voluntary or compulsory.
Creditors Voluntary Liquidation (CVL) is initiated by the directors who, with shareholders, nominate an Insolvency Practitioner to wind up the insolvent company. Creditors formally make the appointment, hence the term CVL. The liquidator must be a licensed Insolvency Practitioner who will dispose of all company assets and share the proceeds with creditors in accordance with their adjudicated claims and priorities.
The liquidator will also report on the conduct of the directors in relation to the demise of the company. This should show that the directors behaved responsibly and no wrongful trading took place.
Compulsory liquidation is initiated by a creditor, or government agency such as HM Revenue and Customs, who can demonstrate that all reasonable steps to recover an undisputed debt have failed (eg debt collector). A winding up petition is served and a liquidator is appointed by the courts.
Either the official receiver or an IP will be appointed to act as liquidator. Even if the debt is paid at this stage the wind-up hearing will go ahead with attendant risk to the reputation of directors. Compulsory liquidation can be seriously damaging to directors and should be avoided if at all possible.
Is it possible to continue trading after company liquidation?
No. Company liquidation results in the company being completely dissolved. All assets are sold, these funds are used to paid creditors and the company ceases trading..
How does company liquidation affect directors?
Directors are monitored throughout the process of voluntary liquidation and providing their conduct is good, there need be no lasting consequences. Compulsory liquidation, however, can be damaging for the directors and really should be avoided at all costs.