Liquidation

What liquidation means

Liquidation is the process of closing a company and selling its assets to pay creditors. After liquidation the company stops trading and is removed from the register of companies. The goal is to turn the company's assets into cash and distribute that cash in an order set by law.

Liquidation applies mainly to companies. Individuals with debts face bankruptcy instead. But the ideas are similar. Someone takes control, sells what is left, pays people who are owed money, and then the company ends.

Why companies go into liquidation

Common reasons:

• The company cannot pay its debts when they fall due.
• Directors choose to close the company while it still has assets.
• Creditors force the company into liquidation through a court order.
• The company has completed its purpose or shareholders decide to wind it up.

If a business can be rescued, other options may be better. Liquidation is often the final option.

Types of liquidation

There are a few main types. Names vary by country but the ideas are the same.

• Voluntary liquidation by shareholders. The owners decide to close and sell assets. This can be done when the company is solvent or insolvent.
• Creditors voluntary liquidation. When a company is insolvent, the directors and shareholders call a meeting and the creditors take control by appointing a liquidator.
• Compulsory liquidation. A creditor or another party asks the court to wind the company up. The court issues a winding up order.
• Liquidation after a members meeting. If the company is solvent, shareholders can choose a members voluntary liquidation to wind up affairs and distribute surplus.

The role of the liquidator

A liquidator is an officer who runs the process. The liquidator:

• Takes control of the company and its assets.
• Sells assets and collects money owed to the company.
• Investigates the company’s affairs for wrongdoing.
• Pays creditors in the legal order.
• Distributes any remaining money to shareholders.
• Files reports and ultimately dissolves the company.

Liquidators are usually insolvency practitioners. They must act in the best interests of creditors.

Order of payment

Not everyone gets paid at the same time. Law sets the order. Typical priority is:

1. Costs of the liquidation and the liquidator’s fees.
2. Secured creditors with fixed charges over assets. These lenders can sell the asset or get paid from its sale.
3. Preferential creditors. This can include certain employee claims and tax obligations, depending on local law.
4. Secured creditors with floating charges. They share a fund called the ring fenced pool in some jurisdictions.
5. Unsecured creditors. Trade suppliers, landlords, and most lenders fall here.
6. Shareholders. They get paid only if anything is left after all debts.

A secured creditor with a valid fixed charge is in the strongest position.

What happens to employees

Employees often have special protection. They may be owed wages, holiday pay, and redundancy pay. These often rank high in the payment order. But if funds are limited, employees can still lose some rights. Many countries have government schemes that cover some unpaid employee claims.

Effect on directors and shareholders

Directors lose control of the company once a liquidator takes over. Shareholders lose their ownership after assets are sold and debts are paid. If directors acted fraudulently or improperly, liquidators can pursue them for compensation.

Alternatives to liquidation

Often companies try alternatives first because liquidation destroys value. Alternatives include:

• Administration. Aims to rescue the company or its business.
• Company voluntary arrangement. A deal with creditors to pay over time.
• Receivership. A secured creditor appoints a receiver to sell secured assets.
• Selling the business as a going concern.

These options can allow a business to keep operating and preserve jobs.

How long liquidation takes

Time varies. Simple cases can finish in months. Complex investigations, asset recovery, and legal challenges can stretch the process to years.

Key takeaways

• Liquidation sells a company’s assets to pay debts and ends the company.
• There are voluntary and compulsory forms.
• A liquidator runs the process and follows a strict payment order.
• Creditors and employees have priority over shareholders.
• Alternatives like administration may preserve the business.

If you face liquidation, get advice from an insolvency practitioner or lawyer. The choices you make early on can change the outcome for creditors, employees, and owners.