Most businesses consider liquidation to be the last choice because it results in the closure of the company. Winding up a company and selling its assets in liquidation helps creditors collect money and ends any legal procedures involving the company and its directors. These actions, which can be either mandatory or voluntary, always result in the company closing and the directors receiving little compensation. Here’s what you need to know to make that critical company choice with a Liquidator, prepare for the process, prevent extra stress, and finally move on. You’ll also discover the difference between the liquidator and receiver in a company.
What exactly is a Liquidator?
A liquidator or an official receiver is in charge of overseeing the entire liquidation process. When a company enters into liquidation or is wound up by the Court in a compulsory liquidation process brought about by a disgruntled creditor, he or she is appointed.
What Power/ Rights Does a Liquidator Have?
The liquidator has extensive powers, including the ability to realise or sell the company’s assets and use the revenues to settle debts. The liquidator takes over the company, meets all paperwork deadlines, keeps the authorities informed, settles all claims against the company, interviews the directors, and reports on the reasons for the liquidation. He or she will also dissolve the company, which means that it will be removed from the public register at Companies House.
What Is the Purpose of Liquidation?
Most firms face liquidation, which results in the company’s collapse when its assets are liquidated and the proceeds are used to settle creditor claims. The liquidation procedure recovers money for creditors and puts an end to all legal proceedings against the company and its directors. However, when a company closes, the directors/shareholders often receive little compensation.
What Happens at a Liquidator is Appointment?
A liquidator can be appointed in one of several insolvency procedures, such as a Creditors’ Voluntary Liquidation (CVL), which occurs when directors face an insolvent company that is unable to pay its creditors in full and decide to liquidate the company voluntarily. The board of directors decides to close the company and start over. In this instance, the board of directors rather than the company’s creditors initiates the procedure.
The CVL procedure entails convening meetings of shareholders and creditors to enact the necessary resolutions and appoint a liquidator who is a licenced Insolvency Practitioner (IP). The liquidator is hired to close the company professionally, ensuring a fair distribution of the company’s assets among creditors. A CVL procedure does not include the Court or the official receiver.
Members Voluntary Liquidation also appoints liquidators (MVL). This is the point at which the company is solvent and can pay all of its creditors in full. Directors frequently decide to use the MVL structure for tax purposes or to restructure the company. In this case, the necessary resolutions must be enacted in a general meeting in order to wind up the company and appoint a liquidator.
Who has the Authority to Appoint a Liquidator?
Any of the following entities can appoint a liquidator:
- Members in a solvent liquidation, when the main aim is to wind down the company and transfer assets to shareholders
- Director In an insolvent liquidation, directors determine that a company cannot continue; it is no longer a going concern and must be liquidated. Directors hire an IP to help them with the practicalities of liquidating a company. Members/shareholders vote to put the company into liquidation, and creditors either ratify that appointment or vote to appoint an alternative.
- The court in compulsory liquidation, following a petition from a creditor or the company, directs that a company be wound up either because it is insolvent or because it is in the public interest When a winding-up petition is filed but a company continues to trade, the court may appoint a liquidator as a provisional liquidator.
What Is the Difference Between a Receiver and a Liquidator?
The primary difference between a liquidator and an official receiver is the insolvency proceedings that they administer and supervise, rather than the roles themselves. In an MVA or a CVL, the directors appoint a liquidator, allowing them to retain some influence over the process. When a winding-up order is made as a result of a creditor or creditors pushing a company into compulsory liquidation, the Court appoints an official receiver as liquidator. However, if the official receiver considers that the intricacy of the case necessitates the appointment of an IP, he or she may seek the appointment of a liquidator.
What are the Liquidator’s Rights and Duties?
Depending on the form of liquidation, the liquidator has a variety of responsibilities. Their primary task is to turn any residual company assets or property into cash in order to repay as many creditors as possible. In addition to a variety of administrative chores, such as paperwork, he or she will be responsible for investigating director misconduct and scheduling meetings with creditors and directors. The liquidator’s specialised responsibilities will also include the following:
- To evaluate all debts and determine which should be repaid entirely or partially. In some situations, claims may be denied.
- Bring any unresolved contracts or legal disputes to a close.
- Seek appraisals for company assets in order to maximise creditors’ returns.
- Examine the restoration of property that may have been sold at a loss.
- Keep creditors informed and, where appropriate, involved in the decision-making process.
- Inform assets about the status of their claims, the causes of the company’s failure, and the terms of asset redistribution.
- Distribute funds to creditors in a reasonable manner, taking into account the payback structure, which begins with the fees and expenses associated with the liquidation process itself.
- Interview and report on the circumstances that contributed to the demise and liquidation of the company. If he or she discovers the director’s wrongdoing or fraud, notify the Secretary of State.
- Dissolve the company.
How Does a Liquidator Get Paid?
Liquidators charge fees for their services, which vary depending on the size of the company, the complexity of the case, and the amount of time required to accomplish the work. In the case of bankruptcy or liquidation, the Insolvency Act of 1986 establishes the absolute priority (also known as liquidity preference) with which stakeholders are repaid.
According to the law, liquidators’ fees and expenses must always be paid first. Following that, payments are distributed to senior secured creditors, unsecured and subordinated creditors, preferred shareholders, and finally common shareholders.
Liquidators aren’t always involved in the liquidation process. A voluntary liquidation is a company’s self-imposed winding up and dissolution that has been agreed upon by its shareholders. Such a decision will be made when a firm’s leadership determines that there is no reason for the company to continue operating. In other situations, the company may choose to handle the process on its own.
Is it possible to deduct the fees from my taxes?
The old accounting period ends the day before the appointment of the liquidator, and a new one begins on the day of the appointment. Once a liquidator is appointed, the new accounting period will terminate when the winding-up is completed or after 12 months, whichever comes first.
Fees and expenses associated with the liquidation are not tax deductible since once a company ceases trading, it no longer qualifies for a trading deduction for expenses. This means that the cost of liquidation should be considered when evaluating assets and accumulated expenses at the time of company closure.
Is it Possible for a Liquidator to Terminate a Contract or Lease?
When an insolvent company enters liquidation, the liquidator’s principal responsibility is to realise the company’s assets and property and use the revenues to pay off the firm’s obligations and liabilities. However, one of the liquidator’s most important rights is the ability to renounce “onerous property.” Simply put, the liquidator may disclaim any ineffective contracts or company assets that are unsalable or result in liabilities. A business lease, for example, is often “onerous” since there is a duty to pay rent and additional payments to maintain the property.
What is the Liquidator’s Final Account Statement?
During every liquidation operation, the liquidator is required to prepare a final statement of account, which reveals how much he or she realised for assets and property and how that sum was allocated. The cash receipts and payments are shown on the final statement of account. Payments to creditors are made in accordance with the formal repayment structure.
When does a Liquidator leave his or her office?
The liquidator will notify the company’s directors, creditors, and the Court after the company’s affairs have been entirely wound up. Creditors have the right to request additional information from the liquidator, question his or her fees and costs, and even object to his or her removal from office at this point.
However, according to the convention, this must be done in writing up to eight weeks after the liquidator has given notice. If everything is entirely wound up and in order, the liquidator will be released and depart office once he or she has delivered the final statement of account to Companies House and provided notice to the Court that no creditor has objected to his or her release.
Liquidation Sales
Liquidation sales may also be used by businesses to remove pricey inventory at rock-bottom prices. It’s not uncommon to see a business advertise a liquidation sale, in which they sell off as much, if not all, of their stock—often at a steep discount to customers. This may be due to insolvency in some situations, but it is not usually done because they are closing down. In reality, several stores do this to get rid of old inventory and replace it with fresh products.
Liquidator Examples
Many merchants go through liquidation under the supervision of a liquidator in order to dispose of their assets in the event of bankruptcy. The liquidator evaluates the company and its assets and may decide when and how to liquidate them. New inventory shipments will be halted, and the liquidator may prepare to sell existing inventories. Everything associated with the retailer, including fixtures, real estate, and other assets, will be auctioned. The funds will then be organised and distributed to the creditors by the liquidator.
Payless Shoes is one such example. Payless filed for Chapter 11 bankruptcy in 2017 with plans to liquidate practically every store it owned in the United States and Canada. Although it was able to rebuild and survive during that time, it was not completely out of the woods. In February 2019, the company declared bankruptcy again, stating that it would close all of its retail sites in North America—roughly 2,100 stores—and sell its items at a discount to customers.
Liquidators, on the other hand, are not simply assigned to merchants. Other businesses that are in distress may require the services of a liquidator. They may be called upon to deal with concerns that arise as a result of a merger, such as when one company buys out another. For example, during a merger, one company’s information technology (IT) department may become obsolete. The liquidator may be tasked with selling or dividing the assets of one.
Why is it preferable to enter CVL rather than wait for forced liquidation?
If your company is in serious financial trouble, it is far preferable to enter Creditors’ Voluntary Liquidation than to wait for a creditor’s compulsory liquidation. Unlike a liquidator, the Official Receiver has broad investigative powers, and by delaying a winding-up petition, you may accidentally exacerbate creditor financial losses.
If you are determined to have committed director misconduct, you may risk disqualification or possibly personal culpability for some of the company’s debt. By voluntarily putting your company into liquidation, you have the opportunity to select your own liquidator and, more importantly, you can protect the interests of your creditors.
As the director of a company in voluntary insolvent liquidation, you may also be able to claim redundancy compensation, which could be used to offset the professional fees involved.
Liquidator FAQs
What is liquidation in accounting?
The process by which an entity transforms its assets to cash or other assets and settles its liabilities with creditors in advance of discontinuing all operating activities is known as liquidation.
What is an example of liquidation?
When a company declares bankruptcy and liquidates all of its assets, this is an example of liquidation. When you sell your investment to free up cash, this is an example of investment liquidation. The sale of a company’s assets is part of the process of dissolving the company.
What is the difference between a receiver and a liquidator?
A receiver appointed by the court serves on behalf of both the company and its creditors in order to reach repayment agreements that benefit both sides while a liquidator, on the other hand, solely represents the creditors and shareholders’ interests.
