How does business liquidation work?

There are a variety of reasons that can cause a business to find itself in trouble and sometimes the factors involved can snowball unexpectedly fast. An economic downturn, rapid market changes, new competitors coming into the market, a change in technologies or even just misjudgements of strategy can sometimes leave a business in an unsustainable position.

There are many ways that a business may choose to deal with these problems including restructuring, changing management, downsizing or perhaps a merger or acquisition could be considered. Sometimes however the best or only solution is to lead the business into liquidation. So what exactly is business liquidation and how does it work?

What is business liquidation?

When a company is in trouble and it has debts that it simply can’t afford to repay then the owners of the business may choose to liquidate or ‘wind up’ the company. Usually a specialist company will be appointed to place a value on and sell off any assets the company may have and then any money raised will be used to pay back the creditors to the business, either in full or partially. If the creditors are able to be repaid in full then any remaining money will then be distributed out amongst the shareholders of the business.

A winding up resolution

Before the process of liquidation can begin the director of the company is required to call a meeting of all the shareholders to propose a ‘winding up resolution’. In order for this winding up resolution to be passed, at least 75% of the shareholders must agree to the resolution. The 75% is made up not by the total number of the shareholders but by the value of the shareholding, so if you were to have two shareholders who each owned 40% of the value of the shares and they were to both agree to the winding up order, then the order would effectively be passed regardless of the feelings of the other shareholders who own the other 20% or less.

Once the winding up resolution is passed the company must first appoint an authorised insolvency practitioner such as Wilson Field business recovery to take charge of liquidating the company. They must then send the resolution to Companies House within 15 days and also inform the gazette which holds an official public record of all business liquidations.

Calling a meeting of the creditors

After the winding up resolution has been passed and an authorised liquidator has been appointed the director must then call a meeting of all of the creditors within 14 days. At least one other director, the company secretary or the liquidator must be present at this meeting. The creditors must be given at least 7 days warning about the meeting and again the meeting must be advertised in The Gazette. This meeting will provide the creditors with an opportunity to question the directors of the company about the failure of the business and also to suggest a different liquidator if they feel the need.

Liquidating for reasons other than debt

All of the information outlined so far applies mainly to liquidation due to insolvency or the inability of a company to pay its debts, this kind of liquidation is usually referred to as a ‘Creditors’ voluntary liquidation’. Sometimes though a company may be solvent but the director still wants to wind it up for personal reasons such as retirement or if he simply does not want to continue running the business any longer. This kind of liquidation is known as a ‘Members’ voluntary liquidation’ and the processes involved are different to those which have been outlined above. If you are liquidating your business for reasons other than debt then more information on the processes involved can be found here.

What does the liquidator do?

The liquidator is the practitioner who runs the liquidation process. When a liquidator is appointed they will immediately take over the running of the business from the directors. They will then deal with any legal disputes or contracts that may be outstanding and begin the sale of the company’s assets to pay back any creditors in an order which the liquidators will decide. They will also ensure that any liquidation costs or VAT bills are paid, hold meetings with the directors to establish why the company has failed and make a report of this, and then finally they will also need to remove the company from the company register.

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One Response to How does business liquidation work?

  1. I just heard about business liquidation. And for this article, I fully understood it. Thanks for sharing.

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