What does it mean when a company is in liquidation? The fact is, many company directors don’t completely understand the liquidation process or what it means for them. This can make it more alarming when a customer’s or supplier’s business is being liquidated—especially if they owe you money.
Liquidation is a process used to close a company and dissolve it. The business’ assets are sold off to pay creditors and it is removed from the Companies House register, meaning that it ceases to exist.
The liquidation process can be undertaken voluntarily, or it can be forced upon a company by creditors who want to get money back.
Liquidation is not the same as insolvency. Insolvency is a state of being. It describes a company that has insufficient assets and cash flow to cover its debts.
Insolvent companies won’t necessarily be liquidated, and liquidated companies aren’t always insolvent. For example, an insolvent company could be rescued by being restructured or going into administration.
Directors may decide to liquidate their company if:
Market conditions mean that the company is no longer viable
Revenue has been decimated due to the loss of key customers
The company has been left with bad debt and cannot sustain the loss
The business is having cash flow difficulties
Customers are not paying their bills
Generally, all liquidation types follow a similar process, but there are some variations.
Here’s what the liquidator does once their appointment has been confirmed:
1. Investigation
The liquidator gathers as much information on the company as possible by reading company books, records, asset details, and debts. This gives them a thorough understanding of the company’s financial position.
At the end of this process, the company is liquidated. It ceases to exist and cannot trade.
There are several different types of liquidation and this section describes each one in detail. Which one is used depends on the current state of the company and who triggered the liquidation.
This is when directors choose to wind up their business. It is usually done in the face of creditor pressure and/or financial distress that is likely to get worse.
If a business has no viable future, a creditors’ voluntary liquidation is a good way to close down the company. That’s because:
After a creditors’ voluntary liquidation, all debts that cannot be repaid will be written off by creditors, unless they are secured by a personal guarantee.
Sometimes known as solvent liquidation, this is a process for closing down a solvent company. It allows directors and shareholders to close down a business that is no longer needed or that they wish to extract profits from. A members’ voluntary liquidation is not the same as a company strike-off, which is a quicker and cheaper process, but limits the amount of funds that you can take out of the business.
The MVL process is similar to that of CVL.
This is when a creditor petitions the court to liquidate a company because it has not paid its debts to them.
Directors and shareholders can also place their own business into compulsory liquidation by submitting their own winding-up petition to the court, but this is rare.
If you are an unsecured creditor, forcing a customer company into liquidity is usually a last resort. There is very little chance that you will get back the money owed. We’ll explain why later in this article.
A company strike-off is an alternative to liquidation and is a quick, easy way to dissolve a business. Directors simply fill in a form, pay a small fee and the business is struck off the Companies House register. After this, it ceases to exist as a legal entity. A company strike-off is suitable for businesses with little or no assets. Directors can extract assets worth up to £25,000 but anything beyond this becomes property of the Crown.
🚨Don’t ignore creditors’ meetings |
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If you are a creditor of an insolvent company and you are invited to a creditors’ meeting it is a good idea to attend. You will be given details on the business’s financial position and liquidation process. |
Liquidators are licensed insolvency practitioners. When one is first appointed they help the directors understand if the insolvency route they have chosen is correct. It may be that the company is salvageable and company administration or restructuring may be a better option.
Liquidators also take responsibility for:
Directors have to:
Generally, insolvency takes one to three weeks to complete. However, it can take longer. Every liquidation is different and the length of time it takes depends on a number of factors, including:
No. Directors should stop trading as soon as they make a decision to liquidate the company.
Directors found to be trading while insolvent could be charged with wrongful trading. If this happens they will be personally liable for some or all of the company’s debts and could be banned from being a company director for up to 15 years.
Insolvent companies can continue to trade, as long as the directors act in the creditors’ interests — for example, by appointing licensed insolvency practitioners.
You should not trade with a company in liquidation. Businesses that are being liquidated should have ceased trading and had their bank accounts frozen.
If a company director is attempting to trade with you while their company is in liquidation then they are breaking the law. You risk losing any money that you pay them during this period.
You can continue to trade with an insolvent company. However, this is risky and you should take steps to get significant guarantees on any credit that you extend to the insolvent business.
Directors of liquidated companies can start a new legal entity and buy all of the previous company’s assets. This essentially allows them to continue the business as a different company.
The main rule is that business assets must be acquired from the liquidator at fair value.
Also, for five years directors cannot:
However, there are some exceptions to this:
If one of your customers becomes insolvent it is usually bad news.
At best, you’ll lose vital revenue. But if the customer owes you money through unpaid invoices then it will be much worse—especially if the money owed to you is a significant sum.
As mentioned above, when an insolvent company is liquidated, its assets are sold off to pay the outstanding debt.
Since the definition of insolvency is when a company’s debts outstrip its assets and cash flow, it stands to reason that there won’t be enough money from this process to pay off everyone in full.
The liquidator is legally obliged to pay creditors in the following order:
In other words, companies like yours are paid last and on average the returns are well under 10% of the total debt.
The outstanding debt is written off and you have to take on the loss as bad debt. Companies that experience this kind of loss are three times more likely to become insolvent themselves in the next twelve months.
Liquidation is the last step of the insolvency process. Once a customer company has entered liquidation, there is nothing you can do.
The best way to avoid customers that go bust is to ensure you only work with financially healthy companies. There are two ways to do this:
Both of these require a business credit scoring database, and this is where Red Flag Alert comes in.
We have data on every UK company and our detailed business financial health scores are the best in the industry—in fact, we often spot financial risk that our competitors miss.
Here’s how Red Flag Alert can protect your business:
Making sure that companies are financially sound by conducting company credit checks before you agree to work with them is a great way to avoid losing customers and experiencing bad debt.
We have over 100 data points on every UK company and this information is updated in real time.
Our machine learning algorithm uses this data to calculate an accurate credit rating for every UK business. Using our insolvency risk score, healthy companies are rated gold, silver and bronze, while businesses at risk of insolvency are rated one, two or three red flags.
This allows you to set your risk tolerance when onboarding new customers. Better yet, your sales team can use our credit scores when prospecting to ensure they only approach healthy businesses.
Even if your customers are financially healthy during onboarding, it doesn’t mean that things won’t change in the future.
That’s why we provide financial health monitoring tools.
You can use Red Flag Alert to set up monitoring alerts that inform you as soon as something changes in each customer’s financial health.
This allows you to take proactive measures to protect your business. This could be further monitoring, or even withdrawing credit and calling in invoices.
Red Flag Alert is the perfect tool to protect your business from financial risk. It provides:
To find out how Red Flag Alert can help your business, request a demo.
Or for more information on how to protect your business, read our article on managing risk in the post-pandemic economy.