The liquidation of a company is a process whereby the company is closed down, the assets realised (liquidated) and the balance after costs is distributed among creditors. It is a terminal process and usually occurs where there is no viable business to take forward.
There are two ways in which an insolvent liquidation of a company can be initiated. The first is where a creditor takes the initiative and issues a winding up petition, following which the company is wound up by the court (a compulsory liquidation). The second is where the directors of the company take the initiative and convene meetings of the shareholders and creditors and the company is placed into Creditors’ Voluntary Liquidation
Compulsory Liquidation (Winding up by the court)
For a creditor to qualify to issue a winding up petition against a company, it must have an undisputed debt of at least £750 (the anticipated increase to £5,000 in October 2015 does not appear to have been implemented, although it was for creditors’ petitions for bankruptcy of individuals). Usually, but not always, the creditor will issue a statutory demand to the company, giving it a period of twenty-one days, from the date of receipt to either pay the debt or to reach an acceptable means of payment. If neither of those happens, the company is deemed to be insolvent and the creditor is entitled to issue a winding up petition.
The creditors will issue the petition to the court and pay the requisite court fee, following which the court will endorse the petition with a hearing date, seal it and return a sealed copy to the creditor. The creditor will then arrange for the petition to be served on the company at its registered office. Subsequently the creditor must arrange for the petition to be advertised in the London Gazette. He cannot however advertise the petition until at least seven working days have elapsed from the date the petition was served on the company and the advertisement must appear not less than seven working days before the date the petition is to be heard by the court.
If the company does nothing, the court will make a winding up order on the hearing date and the company will then be in liquidation. Following the hearing, the directors of the company will be contacted by the Official Receiver, who will require them to complete an extensive questionnaire, following which, they will be interviewed to explain what has led to the insolvency of the company.
Once the Official Receiver has all of the facts relating to the company, he will decide whether to convene a meeting of creditors to appoint a private practice liquidator. If he decides not to do this, he will either administer the liquidation himself, or appoint a private practice liquidator, using powers delegated to him by the Secretary of State for Business Innovation and Skills. Whether the Official Receiver or a private practitioner conducts the liquidation, the Official Receiver will conduct an investigation into the conduct of the directors during the period leading up to the liquidation.
Creditors’ Voluntary Liquidation
This process is initiated by the directors when they have decided that the company cannot continue and should be wound up. Usually, at the time they reach this conclusion, they will consult a Licensed Insolvency Practitioner, who will advise and guide them through the process.
Initially the directors will convene two meetings. The first being a general meeting of the shareholders and the second, a meeting of the company’s creditors. They must give at least fourteen days’ notice to the shareholders of their meeting and at least seven days’ notice to the creditors. In practice, both meetings are held on the same day and the notices are issued simultaneously.
One of the directors of the company must act as the chairman of both meetings
During the period between the issue of the notices and the meetings, the Insolvency Practitioner will prepare a Statement of the Company’s Affairs and a report on the history of the company and the reasons for its failure.
The purpose of the shareholder’s meeting is to pass a resolution to wind up the company and to appoint a liquidator and this is held immediately prior to the creditors’ meeting.
At the creditors’ meeting, the Insolvency Practitioner will deliver the report he has prepared, to the creditors and then invite them to question the director further on the reasons for the failure of the company. Once the questions are over, the meeting will move to the formal business, which is the appointment of the liquidator and to determine the manner in which his fees will be paid. The creditors have the final say as to who will be appointed liquidator and if they nominate someone other than the shareholders’ appointee, a vote is taken. Creditors vote either in person or by proxy and the nominee with the greatest value of votes is appointed as liquidator.
The creditors may also choose to elect a Liquidation Committee, to whom the liquidator will report from time to time, although such committees are rarely appointed these days.
Once appointed, the liquidator will deal with the realisation of the assets and he will conduct an investigation into the directors’ conduct in the period leading up to the liquidation