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Liquidations
What is liquidation?
Liquidation usually means, the company's trading stops and its assets are turned into cash or "liquidated". All other possible liabilities, like employment or renting a property, are stopped.
There are three types of liquidation in the UK:
- Creditors Voluntary Liquidation
- Compulsory Liquidation
- Members Voluntary Liquidation
Creditors Voluntary Liquidation
Creditors Voluntary Liquidation is a procedure instigated by the directors, who make a decision that the company is not viable, it is insolvent and should stop trading. The directors then ask a licensed insolvency practitioner to call both a members’ and creditors meeting as soon as possible (not less than 14 days notice is required), in order to pass the resolution to wind up the company and appoint a Liquidator.
Compulsory Liquidation
Compulsory winding-up is a legal process by which a liquidator is appointed by order of the court to 'wind up' the affairs of a limited company. At the end of the process the company ceases to exist. Winding up does not mean that the creditors of the company will necessarily get paid. The purpose of winding up a company is to ensure that all the company's affairs have been dealt with properly.
This involves:
- ensuring all company contracts (including employee contracts) are completed, transferred or otherwise brought to an end;
- ceasing the company's business;
- settling any legal disputes;
- selling any assets;
- collecting in money owed to the company; and
- distributing any funds to creditors and returning share capital to the shareholders (any surplus after repayment of all debts and share capital can be distributed to shareholders).
When these things have been done the liquidator applies to have the company removed from the register at Companies House and dissolved, which means the company ceases to exist.
How do I prove to the court that the company cannot pay its debts?
The court will regard a company as being unable to pay its debts if any of the following occurs:
- A creditor who is owed more than £750 serves a 'statutory demand' (Form 4.1) for the money due and it is not paid or secured, or a settlement is not agreed, within 21 days. You can get the form for a statutory demand from your local court or from The Insolvency Service's web site at www.insolvency.gov.uk. The completed form must be served on the company at its
registered office. The creditor must have proof of service, so it is usual to employ a process server (these are listed in Yellow Pages under 'detective agencies'). The court is not involved in issuing statutory demands, so no court fee is payable. However, the company can dispute the statutory demand and apply to court for an order restraining the creditor from presenting a winding up petition. - A creditor obtains judgment against the company and execution is unsatisfied; in other words the sheriff or bailiff is unable to seize enough assets to clear the debt. You can get the forms to issue a claim for judgment from your local court or from the Court Service website at www.hmcourts-service.gov.uk.
- It is proved to the court that the company cannot pay its debts when they fall due; for example, no payment is made in response to a letter of demand.
- It is proved to the court that the company's total debts exceed its total assets.
Members Voluntary Liquidation
This is a procedure where the company is not insolvent or the purpose for which the company was formed has come to an end. The company assets are realised and creditors paid in full. Any surplus funds are paid back to shareholders.
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