A common phrase often heard in business is that of ‘in liquidation’ and this is a specific legal status for a company having direct consequences for creditors, employees and directors alike.
When companies get into trouble they will often enter into an agreement, such as a Company Voluntary Agreement which is a payment plan designed to get the firm back on track. Whilst this is in place the business will still be trading as normal.
However, if the company has no reasonable prospect of paying its debts or if the firm does not stick to the terms of the agreement then Liquidation may follow.
Liquidation is the almost the last act in the life of an insolvent company and for a business that does have the possibility of paying its debts, albeit over an extended period of time or a firm that is trading healthily but has cash flow or balance sheet issues it is unlikely to be the preferred option. Wherever possible courts prefer to see companies given the chance to pay back their creditors and protect jobs.
Company Liquidation is an option where a business either fails to pay its bills or has contingent liabilities that cause the company to be unviable. If the company has received a statutory demand for payment and fails to comply then they may also find themselves in court and facing a winding-up order.
In the simplest terms liquidation is the process of taking all of the assets, raising as much value as possible from them and then distributing the value back to the creditors and the plain fact is that when there is no prospect of trading out of the current difficulties and the situation is likely to get worse rather than better then liquidation is a method of protecting creditors and returning at least some value.
As you would expect, although this sounds simple, in practice with businesses being so diverse and complex there are many nuances that company directors should be aware of.
As soon as an insolvency practitioner is appointed as liquidator they take control of the business. This means that creditors will need to deal with the liquidator rather than the businesses former directors.
The liquidator has a duty to balance obtaining the most value for the remaining assets with speed and costs as of course, they will need to be paid for their time. They will make an assessment as to the value of the assets remaining and then form a plan as to how they will realise value. It is possible that stock in trade and fixed assets will be sold, often through an auction or through a trade sale to bring cash into the liquidation pot.
They will also investigate whether there is any residual value in assets such as Intellectual Property and brands to see whether these could be sold.
The liquidator will also take steps to ensure that any further costs are not incurred and will sadly be forced to make staff redundant and close establishments such as shops, offices and warehouses.
There are also a series of meetings and communication that the liquidator is bound to act and they will need to keep creditors informed as to the progress of the liquidation.
Liquidation also means that the conduct of the former directors will be examined. The liquidator will want to assess whether they have acted properly and in accordance with their duties. Did they allow the company to trade whilst insolvent (wrongful trading)? Did they sell assets to related parties at below market rate? Have they acted dishonestly in their dealings as a director?
This part of the process may well involve interviews with the directors to identify what went wrong and will result in a report to the court as to their actions.
The liquidator will then return any value obtained, less their fees to the creditors of the company in the form of a dividend. The dividend is usually a lot less than the outstanding debt and for creditors, this is a salutary lesson that liquidation is the last resort of a failed business.
Whether you are owed money, or you have a company that you feel may be insolvent it is important to take qualified and experienced advice as early as possible to maximise the number of options available to you.
Liquidation should be the last resort for creditors as the value returned is rarely enough to cover the full debt. At the same time liquidation is not something to be sought out by directors without the help of qualified insolvency professionals.