So what is liquidation and how is this defined?

Generally when people talk about bankruptcy in the UK this only applies to individuals.  The term used in the UK for companies is Liquidation.

When a company can no longer afford to pay its debts as and when they fall due, the company may be what is described as insolvent.  When a company is insolvent then advice should be taken to see if the company can be rescued and returned to profitability.

If the company cannot be rescued and is incurring more debt then it may be appropriate to place the company into liquidation, so that an insolvency practitioner can try to pay back as much as the debt as possible to the company’s creditors.

Applicable Law

What is liquidation, in the Insolvency Act 1986 the primary legislation (or law) that applies to all insolvency proceedings, gives two ways to putting a company into liquidation.

Route one is by passing a resolution in accordance with Paragraph 84 of the Insolvency Act 1986 this is known as voluntary liquidation.   The effect of this resolution provides for two types of liquidation:-

  1. Creditors Voluntary Liquidation
  2. Members Voluntary Liquidation

Voluntary liquidation is instigated by the directors of the company and is a process that is driven forward by the directors with the help of an insolvency practitioner.

Route two is by Order of the Court in accordance with Paragraph 117 of the Insolvency Act 1986, this type of liquidation is known as Compulsory Liquidation.

Compulsory liquidation is usually instigated by a creditor (someone who the company owes money to) and they request the Court to make an order to wind up the company.

 

When a company is liquidated

Once a company goes into liquidation then a liquidator is appointed this either be an independent liquidator like the ones at Inquesta or this can be the Official Receiver (the Official Receiver will only deal with Compulsory Liquidations).

Ultimately the purpose of the company going into liquidation is for the liquidator to maximise the realisation of the company’s assets.  There are a number of ways which the liquidator can do this, this can be through selling the assets of the company (i.e. stock, plant and machinery, property, fixtures and fittings), collecting in debtors (people who owe the company money), investigating into any antecedent transactions that the company may have into, investigating into the actions of the directors.

Once the liquidator has realised the assets of the company (as described above) then a distribution can be made to creditors.

There is an order of priority which the liquidator has to follow when making a distribution to creditors as follows:-

  1. Costs and expenses of dealing with the fixed charge
  2. Fixed Charge Creditors
  3. Cost and expenses of liquidation (including the liquidators remuneration)
  4. Preferential Creditors
  5. Floating Charge Creditors & Prescribed Part
  6. Unsecured Creditors
  7. Shareholders

So depending on which category you fall into will depend on how much you get as each of the categories have to be paid in full before the next category gets paid.  This ultimately means that in an insolvent liquidation the shareholders usually get nothing at all and the unsecured creditors are paid a few pence in the pound, while the preferential creditors are usually paid in full.

To find out more about what is liquidation then please contact us or chat online (if available)