What is a Liquidation? is a page providing a guide to Liquidation. Liquidation is in essence the death of a company. A liquidator is appointed to act instead of the Directors to wind up the company’s affairs. Can you liquidate your own company? The answer is no because a Liquidation has to be undertaken by a Liquidator who is a Licensed Insolvency Practitioner or government official known as the Official Receiver.
There are two types of insolvent liquidation by virtue of Section 73 of the Insolvency Act 1986: Compulsory Liquidation or Creditors Voluntary Liquidation. Contact us for any advice as to how we may assist you with a liquidation matter. A solvent liquidation is known as a Members Voluntary Liquidation. So if you are going to liquidate your company you will need to consider if the company is insolvent or solvent.
If you are finding that your company is finding it difficult to keep up with paying debts on time you may find some useful information here. Please feel free to contact us at your earliest convenience for free confidential advice on your situation.
This guide refers to the following matters:
A Members Voluntary Liquidation (“MVL”) is a solvent liquidation and one of the ways to liquidate your company when the creditors can anticipate and ought to obtain 100 pence in the £. An MVL can be undertaken entirely online.
A MVL is a procedure that is not strictly an insolvency procedure because the company is solvent and the creditors will be paid in full. It is a procedure that enables a business’ trade to be concluded and for a distribution to be provide to the shareholders or otherwise known as the members.
It is commonly undertaken for reasons of tax efficiency to obtain entrepreneurs relief for capital gains tax purposes.
The process looks to obtain tax clearance from H M Revenue and Customs so that the Directors and Shareholders can be confident that there will be no claims remaining against the company.
How to prepare for Members Voluntary Liquidation
In order to prepare for a Members Voluntary Liquidation the following is required:
- Statutory Declaration of Solvency based on an Estimated Statement of Affairs
- Meeting of the Board of Directors to confirm the winding up
- Members Resolution authorising the winding up and appointment of a liquidator
A Creditors Voluntary Liquidation (“CVL”) is one of the ways in which you as a director can liquidate your company. You will typically approach an Insolvency Practitioner to wind up the company’s affairs without any involvement by the court.
A Creditors Voluntary Liquidation is initiated by a shareholders’ resolution. It involves the end of the insolvent company and the distribution of the company’s assets to the creditors. This procedure enables directors to avoid unsecured limited company debts that are not personally guaranteed. That is subject to the provisions associated with Wrongful Trading which is why it is so important to get advice at the earliest opportunity.
A crucial defence to any claim for Wrongful Trading is that the Directors took every step with a view to minimising the potential loss to creditors. Directors need to be able to show what steps they took, how they took them and how those steps were of benefit to creditors. Taking professional advice and documenting what was done and the reason for it, will go a long way to being able later justify the position when it is being viewed with hindsight.
A creditors voluntary liquidation is by virtue of its name ‘voluntary’. There is no compulsion on a Director to deploy this procedure. However, many Directors consider it to be the right and responsible approach to be proactive for the overall benefit of the company and its creditors by ensuring that appropriate professional advice is taken. It will enable the processes of concluding the company’s activities are swiftly undertaken instead of waiting for creditors to take their own action themselves.
As a Director you may see voluntary liquidation as an appropriate exit from a stressful situation for you to liquidate your company; whilst addressing all of the creditors, appropriately. If the limited company has liabilities that it cannot afford to pay and you would like to move on without the stress of the company’s debts hanging over your head, this type of procedure may be an appropriate option. Although it should be seen as a last resort, liquidating a company via this route can be considered a reasonable decision. Apply for a CVL online here.
How to prepare for a Creditors Voluntary Liquidation
In order to prepare for an CVL the following is required:
- Estimated Statement of Affairs
- Meeting of the Board of Directors to confirm the winding up
- Members Resolution authorising the winding up and appointment of a liquidator
- Creditors Resolution to consider the appointment of the Member’s liquidator
A compulsory liquidation is when a court has issued a winding up order after a hearing of a winding up petition. Following which the Official Receiver is initially typically appointed as the Liquidator.
The Official Receiver is a government official who is employed by a government executive agency known as the Insolvency Service. Upon the making of a winding up order creditors can either leave matters with the OR to be the liquidator or alternatively attempt to appoint an Insolvency Practitioner (“IP”) to be the liquidator instead of the Official Receiver.
A Director whose company has gone into compuslory liquidation will have to attend on the Official Receiver and complete a very detailed questionnaire and narrative statement. This will assist in the understanding as to the reasons for the company’s demise.
There are two ways in which creditors can appoint an Insolvency Practitioner to be the Liquidator. If not less than 50% of creditors by value make a request of the OR then they can appoint an IP. Alternatively, creditors if they represent not less than 25% of creditors by value they can requisition a Decision Procedure to vote on the appointment of an IP to be the liquidator instead of the OR.
As Director and or Shareholder you can still use this approach to liquidate your company also but you will have to deal with the investigation of the Company’s affairs through the Official Receiver.
If you liquidate your company a Liquidator will be appointed. Liquidator duties involve a number of statutory duties which apply as follows:
- Duty to call meetings when requisitioned in accordance with the Insolvency Rules.
- Duty of notification via advertisement of the appointment and the convening of creditors meetings
- Duty to provide annual progress reports to creditors and file the same at Companies House
- Duty to provide information to the Official Receiver.
- Duty to collect the Company’s assets.
- Duty to realise assets and discharge liabilities.
- Duty to discover who the creditors of the Company are and the amount of their claims.
- Duty to meet the prescribed requirements for the provision of security (referred to as a bond) for certain types of losses in relation to the insolvent estate.
- Duty to manage and administer the insolvent estate and its funds.
It is the primary duty of a liquidator of a company to collect its assets with a view to discharging its liabilities to the extent the assets permit. To perform that function the liquidator needs information. The companies legislation has for many years given a liquidator power to obtain it from those who can be expected to have relevant information.
A Liquidator is obliged to take custody and control the Company’s property, which includes its books, papers and records as defined in Section 436 of the Insolvency Act 1986. A Liquidator enters office as a relative stranger to the Company and is required pursuant to Statement of Insolvency Practice Number 2 (“SIP 2”) to investigate and reconstitute knowledge of the Company. SIP 2 states as follows:
“…an office holder has a duty to investigate what assets there are (including potential claims against third parties including the directors) and what recoveries can be made… locate the company’s books and records (in whatever form), and ensure that they are secured…”
In the satisfaction of reconstituting knowledge of the Company a Liquidator is obliged to consider any claims capable of swelling the Company’s assets, including but not limited to consideration of prior transactions that could give rise to an action for recovery. A Liquidator would therefore need to seek to identify, discover and recover the Company’s property. To undertake that exercise a Liquidator will need to obtain the books and records for the Company from its Officers and if relevant its agents. Whilst there are many and varied statutory functions of a liquidator, obtaining the books and records is arguably one of the most important duties. Without the same it could be difficult to identify the assets with sufficient specificity to enable their recovery.
A Liquidator is obliged under SIP 2 to undertake an Initial Assessment (“the Initial Assessment”) of matters which might lead to recoveries for the Company. In consideration of the extent of those investigations the legislation directs that a Liquidator is required to investigate the Company’s affairs, dealings and property.
What is a Liquidation Initial Investigation / Assessment? A Liquidator’s duties will involve the need to undertake an initial investigation which includes a review of the financial information available and obtaining further information from third parties via the following kind of preliminary enquiries:
- Invite creditors to bring to his or her attention any particular matters which they consider requires investigation.
- Make relevant enquiries of accountants, solicitors and other professionals
- Compare the statement of affairs and or the official receiver’s report with the last filed accounts in order to ascertain whether all significant assets can be identified and material movements in assets can be properly explained.
- Conduct an initial review of the books and records in order to identify any unusual or exceptional transactions
In conducting this exercise they would have regard to the size of the business, the level of assets avaiIable to fund any identified further investigations or actions, and the materiality of any matters that may have arisen. This review will often result in further, more detailed, investigation into aspects of the financial affairs.
As a result of the Initial Assessment Liquidator Duties may render it necessary to undertake a number of further enquiries, typically such as those detailed below:
- Communicating with tbankers and obtaining all relevant bank records.
- Reconstructing the books and records to deal with any incompleteness, perceived or otherwise as to the position of the records.
- Forensic examination of the bank records, including bank statements, bank mandates, copy cheques and any other items of interest.
- Communicating with the accountant and obtaining all relevant accounting information, including any electronic data.
- Forensic examination of accounting information to establish the financial history and the reasons for its insolvency.
- Identifying financial transactions which may lead to recoveries from claims arising from swelling the assets and property.
- Forensic examination of the books and records.
- Communication with the director(s) to obtain, where necessary, books and records, financial records and to complete and return standard questionnaires to assist with investigating the financial and trading history of the company.
- Communication with agents and/or third parties to obtain information and records relating to the trading and financial history of the company.
- Identifying assets and property with a view to realising any residual value and/or identifying any disposal of assets by the company at less than the market vaIue.
- Reviews to consider ongoing investigations relating to the financial and trading history of the company and potential recoveries for the estate.
Section 144 of the Insolvency Act 1986 in a Compulsory Liquidation states that: “…the liquidator…shall take into his custody or under his control all the property and things in action to which the company is or appears to be entitled” and in a Creditors Voluntary Liquidation is a power by virtue of Section 166 of the Insolvency Act 1986.
In a Compulsory Liquidation when you liquidate your company, a Liquidator is obliged pursuant to Section 143 of the Insolvency Act 1986 to furnish and assist the Official Receiver with such information as may be reasonably required for the purposes of carrying out his or her functions in relation to the winding up.
What is a Liquidation involvement in the company records? By virtue of Section 386(3) of the Companies Act 2006 the Company’s accounting records should have contained daily entries confirming details of all monies received and paid by the Company. In addition, the same should have contained a record of the assets and liabilities of the Company.
A Liquidator would ordinarily be unable to independently verify what assets exist or should exist without having taken possession of the Company’s books, papers and records to assist a Liquidtor to reconstitute knowledge of the Company. A fundamental feature of Liquidator Duties is to obtain such records.
What is a Liquidation to achieve? Liquidator duties will usually involve the need to undertake an information gathering exercise to obtain the books and records and also to obtain the Director’s cooperation to obtain data on the Company.
A Liquidator in accordance with the Insolvency Practitioner Code of Ethics has a duty of transparency to creditors. However, where such transparency might prejudice the administration of the liquidation, a Liquidator may restrict the extent of that transparency. Transparency has to take into consideration matters of privilege, confidentiality and whether it might compromise investigations and or litigation. Legislation or regulation may also produce a conflict for a Liquidator when considering matters of transparency and generally in such regards, then confidentiality will prevail.
There are usually a number of sources of the Company’s books, papers and records to enable a Liquidator to more fully understand the Company’s affairs, dealings and property as follows:
The Company’s officers such as its Directors.
The Company’s accountants who may and often will have acted as its tax agents.
The Company’s bankers who may and often will have acted as its agents in the processing of transactions.
The Company’s solicitors who may have acted as agents.
Once the information has been obtained a Liquidator would usually need to be catalogue and then review it to investigate the Company’s affairs, dealings and property.
If there are any matters that arise from a review of the same that lead a Liquidator to still not have a satisfactory understanding of the Company’s financial affairs or information is incomplete, then it may be necessary for a Liquidator to interview some or all of the Directors. Investigations generally may also involve contacting third parties as part of the process of unscrambling the Company’s dealings.
Liquidator duties in investigations ought to typically have regard to any transactions or trading that appear capable of giving rise to greater realisations for creditors. The provisions under the Insolvency Act 1986 and Companies Act 2006 which may enable a Liquidator to effect the same would include but not necessarily be limited to the following:
Section 212 of the Insolvency Act 1986 – Misfeasance and Breach of Duty
Section 213 of the Insolvency Act 1986 – Fraudulent Trading
Section 214 of the Insolvency Act 1986 – Wrongful Trading
Section 238 of the Insolvency Act 1986 – Transactions at an Undervalue
Section 239 of the Insolvency Act 1986 – Preferences
Section 423 of the Insolvency Act 1986 – Transactions defrauding creditors
Section 847 of the Companies Act 2006 – Unlawful Dividends
What is a Liquidation Task in relation to creditors’s claims? A Liquidator will typically have to ensure the following tasks are undertaken in relation to dealing with the claims of creditors:
Ensure that all creditors’ claims are listed with the correct addresses and references and that the amount claimed correlates to the Statement of Affairs.
Enter proof of debt forms/claims as and when they are received.
Before paying a dividend, review the level of funds available and ensure that all costs and expenses have been paid in accordance with the rules of priority.
Assignment of the right to dividend, where notice is given to the Office-Holder by a person entitled to a dividend that he wishes the dividend to be paid to another person.
Deal with enquires from creditors.
Adjudicate on claims.
Declare and pay a dividend, if sufficient funds are available.
A Liquidator’s administration tasks will usually involve the following responsibilities (reference to the Official Receiver and the Court will apply only in case of Compulsory Liquidation not Creditors Voluntary Liquidations):
On appointment, set the case up on an insolvency database and maintain and separately record all financial records on the case, including the recording of creditors and employees.
Notify creditors of appointment.
When applicable return to the Official Receiver a signed undertaking to pay out of the first realisations of assets, both the balance currently appearing in their account and those monies, including fees, guarantees and advances paid by the Official Receiver, becoming due in future and payable under Insolvency Act 1986 and the IR 2016.
Obtain a Specific Penalty bond for a sum equal to the company’s assets subject to the statutory provisions. This bond covers any losses to the estate for any possible fraud or dishonesty of the Liquidator whether acting alone or in collusion with one or more persons and/or the fraud and dishonesty of any person committed with the connivance of the Liquidator.
To provide creditors with the opportunity to establish a Liquidation Committee when a decision procedure is required.
If a Liquidation Committee is established prepare a certificate of constitution and hold the first Committee meeting.
Obtain the company’s books and records.
Establish whether the company has an occupational pension scheme.
Annual Statutory and Professional Compliance
In addition to the tasks identified above, each year as Liquidator is required to undertake the following statutory tasks:
Prepare and issue an Annual Report to creditors.
Undertake bi-annual case reviews to ensure that the case is being progressed efficiently and in a timely manner; statutory duties have been undertaken; consider any ethical, money laundering and Bribery Act 2010 issues pertaining to the case and ensure that any identified matters are addressed.
Submit VAT returns to HM Revenue and Customs, to ensure that any VAT refunds or payments are received or paid.
Submit annual Tax returns to HM Revenue and Customs.
Maintain the case cash book, by undertaking ISA reconciliations.
Closing Statutory and Professional Compliance
After concluding all case related matters, a Liquidator is required to:
Prepare and submit a letter to HM Revenue and Customs requesting clearance to close the case.
Reconcile the cash book ready for closure.
Prepare and issue the Final Account to creditors.
Send the final receipts and payments account where applicable to the Court, the Official Receiver and the Insolvency Service and confirmation that I have received my release.
If the creditors have so resolved, obtain release from the Secretary of State.
When applicable obtain authorisation from the Official Receiver to destroy the books, papers and other records of the Insolvent Estate.
Retain and store the liquidation records for a minimum of 6 years after the vacation of office.
This post “What is a Liquidation?” is not legal advice and no liability is accepted for any reliance placed upon the same.