Closing a company isn't a simple process. You must undergo a whole process to ensure it's done correctly, from informing employees, hiring a licensed insolvency practitioner, selling company assets and more.
The size of your company, the business's financial position, the company's assets, and any potential business debts will impact the liquidation cost.
In this article, you'll learn all about the liquidation process, explore all the potential liquidation costs, and get a short guide on liquidating a company.
What Is the Liquidation Process?
When a company enters the liquidation process, licensed insolvency practitioners usually take control, realise business assets and distribute funds to creditors.
Once the decision has been made to liquidate a company, it will cease trade. It can no longer employ people, start new contracts, or conduct further business. During liquidation, sold assets pay for any outstanding debts.
Company directors are protected from personal liability due to the limited company having its own legal entity. However, the company directors could be liable for the outstanding debts if loans have provided a personal guarantee for any money owed.
Also Read: How to Set Up a Limited Company in 2024 (Step-By-Step Guide)
There are two types of voluntary liquidation procedures:
- Creditors voluntary liquidation (CVL): A formal insolvency procedure that closes down a business that has outstanding debts owed and can't afford to pay. The business’s assets are sold to benefit the business’s creditors and to cover liquidation fees.
- Members' voluntary liquidation (MVL): A formal procedure governed by the Insolvency Act 1986 used to close down a business that can afford to pay its debts. An MVL isn't compulsory and is a decision made by a company's directors and shareholders.
There is a third liquidation process, and this is compulsory liquidation. Compulsory liquidation involves a business that can't afford to pay its debts and chooses to apply to the courts to liquidate it.
Once a company is liquidated and taken off the Companies House register, it will cease to exist. However, if it's an insolvent company, you may have the option to purchase assets from the liquidated business and start again with a new business name and legal entity.
What Does Liquidation Cost?
The liquidation process isn't free, as several costs and fees are involved.
However, liquidation costs will vary depending on whether you deal with an insolvent or solvent company. The cost to liquidate a company in the UK usually ranges from £4,000 to £8,000 + VAT. The route you take for liquidating a business will also affect costs.
- Members' voluntary liquidation cost: Liquidator fees for MLC start from £1,000. The lowest liquidation cost is usually the straightforward distribution of the company's cash to shareholders. The more complex the liquidation process, the more you can expect it to cost.
- Creditors voluntary liquidation cost: When a company enters liquidation using a CVL process, the costs start from £2,000. Again, depending on the complexity of the process, they could rise quickly.
We've compiled a list of what fees could be included in the total cost of the liquidation process:
- The complexity of the company's affairs: The more complex a company's financial situation and operations are, the higher the liquidation cost. If your company has numerous assets, complex legal disputes, and significant outstanding debts, it will require more of the insolvency practitioner's time and resources, resulting in higher costs.
- Accounting and legal costs: Sometimes, when liquidating a business, a lawyer and accountants may be involved to assist businesses throughout the process. The fees will cover preparing for tax returns, negotiating claims, and resolving legal disputes.
- Professional fees: Liquidating a business involves acquiring an appointed insolvency practitioner who oversees the entire liquidation process, sells assets, and distributes the proceeds to the company's debts, creditors, and shareholders. Professional fees will vary depending on expertise, quality of service and company complexity.
- Asset realisation costs: The selling of the business's assets comes with its own set of eyes, such as auctioneer's fees, transportation costs, and advertising expenses. Costs will vary depending on asset class and sales method.
Due to multiple factors that make up the overall cost to liquidate a company, estimating fees and expenses will be complex as each liquidation case is unique to each business. The initial fee may alter as the practitioner explores your company more, as it could be more or less work than initially anticipated.
Who Pays for the Liquidation of a Company
Usually, when a company faces liquidation, the cost of the process is covered by the sold assets and paying the company's debts.
However, not all companies have assets, or there may not be successful asset sales. So, who pays for the liquidation when the assets aren't enough? If there are insufficient assets, then there are two solutions:
- Director's personal funds: If the company's financial situation isn't great and sold assets can't cover the liquidator fees, directors can pay the fees using personal funds. If a director uses personal assets or funds for a CVL, the insolvency practitioners may charge fixed pre-appointment fees but eliminate the post-appointment fees.
- Third-party funds: If company assets or cash reserves don't cover the cost, a third party known to the director may be able to step in to cover the expenses. Usually, the liquidator agrees to only a pre-appointment fee.
Asset sales usually cover the liquidator's fees, but the company's director and third parties may need to step in if the funds are insufficient.
How Is Liquidation Paid for If There Are No Assets?
Typically, the first protocol of raising funds for liquidation is selling assets that belong to the business to pay back the company's creditors and cover the overall cost of liquidating.
However, if there are no assets to sell or limited asset sales, other ways exist to pay the liquidation fees.
- Redundancy money: If there is any redundancy money, you can use it towards any liquidation costs, but you must pay your employees any necessary redundancy first.
- Dissolve the company: If your business has no debts or assets, you can remove it from the Companies House register. You must be a limited company to dissolve a business with Companies House.
- Administrative dissolution: If your company has debts but can't afford liquidation, you can use Administrative Dissolution to clear debts and close the company at a lower cost than liquidation.
Do You Need an Insolvency Practitioner to Liquidate a Company?
A company can only be put into voluntary liquidation by its shareholders, and the liquidator appointed must be an authorised insolvency practitioner.
The law requires all company liquidations to be overseen and executed by an insolvency practitioner.
An insolvency practitioner acts as a third party and oversees the process from an outside perspective as they're not personally involved. Their role is to ensure the liquidation is following the law. The practitioner will handle the entire process from start to finish.
The roles and responsibilities insolvency practitioners oversee are as follows:
- Safeguarding creditors and ensuring all assets available once insolvency begins are still in place.
- Undertakes the realisation of company assets and shares the funds equally between listed creditors — any funds left after asset sales are shared amongst shareholders.
- Administrator to achieve the best possible outcome for creditors or to help rescue the company.
- The practitioner will act as an administrative receiver for secured creditors to oversee the repayments.
- Supervisor of a company voluntary arrangement, ensuring all terms and conditions are met and that there is a fair agreement between the company and creditors.
A liquidator has a legal obligation to investigate a company's operations before the liquidation and has the power to recover monies from company directors and other parties where there has been an improper conductor. Your insolvency practitioner should address the risks in detail with you before they start the process.
What Are a Director's Duties During Liquidation?
As the company's director, your responsibility will shift when your business enters liquidation.
You must act in the best interest of your business's creditors, ensuring all creditors are paid, and the liquidation process is as smooth as possible.
Your duties as director during liquidation should be as follows:
- Cease trading: Once you decide to enter liquidation, you must cease trading immediately. So, all business activities must stop, including making new payments, selling assets and entering into new contracts.
- Lay off employees: You must inform employees of the business situation, make all employees redundant, and pay out any potential redundancy pay.
- Hold shareholder meetings: If you choose to liquidate through a voluntary process, you must host a shareholder's meeting to pass a resolution approving the liquidation. You can collectively discuss and vote on the proposed course of action.
- Find a licensed insolvency practitioner: Company directors must appoint an insolvency practitioner to oversee the liquidation by law. A practitioner will take control of the company's affairs and assets and ensure that creditors are dealt with fairly and assets are disposed of sufficiently.
- Provide necessary information: You must cooperate fully with the practitioner and be transparent about business processes and on-goings. You must share information about all business areas with the practitioner to handle it appropriately. The practitioner will need company documents, financial records and other essential operations and financial knowledge.
- Repay any loan accounts: If you, as a director, have any outstanding loans from the company, you are obligated to repay time to the liquidators. Creditors must be prioritised over any of a director's personal financial benefits.
- Attend any necessary meetings: You must attend any required creditors meetings, where you may be asked questions, address concerns, or provide relevant information.
Depending on your business's complexity, your level of involvement in the liquidation process will vary. The practitioner may ask you for assistance during the process, and the more willing you are to aid in the investigations, the smoother the process will be.
Final Thoughts
The liquidation process varies between companies, as no two companies operate the same or have the same assets. So, consider that your fees could be larger or smaller than the estimation due to your business's financial situation.
Remember, as a director, you must act in the interest of creditors and help your licensed insolvency practitioner in the best possible way to make the process as straightforward as possible.
