Liquidation in the United Kingdom
Get to know the basics of liquidation in the UK with 3E Accounting’s concise guide to closing down your business.
Liquidation in the UK is governed by the Insolvency Act of 1986 and signifies the end of business for a company. It concerns the formal closure of a limited company, and the term ‘liquidated’ is employed to indicate the sale of all company assets. Liquidation will occur before a company is struck off from Companies House’s register of companies. This is to ensure that creditors, as well as shareholders, are indemnified before the company ceases to exist legally.
The Many Ways of Liquidation
Liquidation can occur when a company is insolvent, or the shareholders wish to close the company. Once a company is liquidated, the sale from its assets will be used to pay the creditors and what is leftover will be shared amongst the shareholders. Liquidation can occur in three main ways, depending on the company’s financial position:
- Compulsory Liquidation (WUC) – by virtue of court order, usually after a Winding Up Petition by creditors. Where a Winding Up Order is granted, an Official Receiver will be appointed by the court.
- Members’ Voluntary Liquidation (MVL) – initiated by members or directors and is usually employed to access the company’s profits. These will be viewed as capital gains and not income.
- Creditors’ Voluntary Liquidation (CVL) – initiated by directors and involves the creditors. A licenced insolvency practitioner must be appointed.
Each has specific requirements and procedures, but generally insolvent companies are liquidated via CVL or WUC. Only solvent companies can be liquidated via MVL. The process for liquidation depends on whether the company is solvent or not and whether liquidation is voluntary or compulsory by court order.
Liquidation can take some time, depending on the complexity of the business, the number of assets that need to be liquidated, etc. The procedures and regulations are also quite complicated. Generally, to start the process, the following guidelines are observed:
- Notification of creditors within seven days before general company meeting.
- Meetings between shareholders, directors, members, etc. In a voluntary liquidation, a special resolution must be passed to begin the process.
- Advertisement of the proposed liquidation must be published in the London Gazette.
- Engage Insolvency Practitioner (for voluntary liquidation) or other legal representation (for compulsory liquidation)
The Pros and Cons of Liquidation in the UK
In some instances, it is better to liquidate your company, as it offers a way out for underperforming companies. It allows:
- Bypassing or avoiding court procedures, which can freeze accounts and assets.
- Directors to be protected from accusations of wrongful trading and incurring personal liabilities
- Facilitates the consideration of alternative resolutions such as asset refinancing, etc.
However, liquidation does signify the end of your company, and this means your company name, branding, goodwill, etc., will all also come to an end. Directors may also face personal liability or be the focus of an intense investigation, especially for wrongful trading. If found liable, directors can face stiff penalties and disqualification.
Liquidation is a very formal and serious procedure, which can raise issues of liability if done incorrectly. For example, insolvent companies are not allowed to trade. However, exceptions arise in situations where trading may facilitate settlement towards creditors. Hence, it is advisable to speak to professionals such as 3E Accounting to discuss the best options available for your business. Our team offers confidential and professional consultation as well as customizable business solutions. Contact 3E Accounting today for the help and guidance you need.