From a legal point of view, liquidating a business means the process by which a company is brought to an end and its assets are redistributed. Such a company will stop doing business and employing people and it will cease to exist once it has been removed from the companies register at Companies House.

As a rule, the assets of a liquidated company are used to pay off its debts and the money left are shared between the shareholders, or, if they haven’t been shared by the time the company is removed from the register, they will go to the state and they can be recovered only by restoring the company.

Depending on who is requesting the liquidation, there are 2 kinds of voluntary company liquidation:

  • If your company can’t pay its debts, so you and your shareholders choose to liquidate, it is called creditors’ voluntary liquidation.
  • If your company can pay its debts but you choose to close it – it is called members’ voluntary liquidation.

Besides these two situations, there is also the context in which your company can’t pay its debts and it can be forced into compulsory liquidation.

If your company can’t pay its debts and if enough shareholders agree, the owner/director can propose a creditors’ voluntary liquidation meaning that your company will stop trading and will be liquidated.

In order to decide voluntary liquidation 75% (by value of shares) of your shareholders must agree to winding-up the company and you need to call a meeting for the vote.

After the vote, if the winding-up resolution passes, there are 3 steps you need to follow:

  1. First of all, you need to choose and appoint an authorised insolvency practitioner as liquidator to take charge of the process of liquidating your company;
  2. Second, you need to send the resolution to Companies House within 15 days.
  3. Third, you have to advertise the resolution in The Gazette.
  4. Next, you need to hold a creditors’ meeting within 14 days of the winding-up resolution where another director, the company secretary or the liquidator must also participate. This meeting must be announced at least 7 days before it happens and needs to be advertised in The Gazette.

The meeting of company’s creditors

The meeting addenda includes a statement of affairs including details of the company’s situation and assets as stated in the forms 4.19 (England, Wales or Northern Ireland) or 4.4 (Scotland), questions addressed by the creditors to the company directors about the company’s failure and the possibility of suggesting an alternative liquidator if the creditors consider necessary. The statement must then be given to the liquidator who will send it to Companies House or to the Accountant in Bankruptcy for companies in Scotland.

Members’ voluntary liquidation is an option for companies that are considered ‘solvent’ (can pay their debts) when the owners want to retire, to step down from the family business and there is nobody else to run it or if they just don’t want to run the business anymore.

The steps of voluntary liquidation include:

  1. Downloading and filling in a ‘Declaration of solvency’, form 4.70, if your company is in England, Wales or Northern Ireland, or form 4.25 (obtainable from the Accountant in Bankruptcy) if your company is in Scotland. You will need the signature of the majority of directors.
  2. General shareholders meeting after at least 5 weeks with the objective of passing the resolution for voluntary winding up.
  3. Once the resolution has passed, the next step is advertising it in The Gazettewithin 14 days. Don’t forget that within15 days of passing the resolution you need to send your signed form to Companies House or the Accountant in Bankruptcy (for Scottish companies).
  4. Appointing a liquidator, which is usually an authorised insolvency practitioner to take charge of winding up the company which will take control of the company.

You can find a liquidator or an insolvency practitioner through The Insolvency Service directory. The liquidator’s role is to run the liquidation process and to take control of your business.

The liquidator will:

  • Sell the company’s assets, hold meetings with the people to which the company owes money (creditors), decide which creditors should be paid first and use any money to pay them.
  • Hold interviews with the directors and make a report on what went wrong in the business.
  • Solve any legal disputes or outstanding contracts.
  • Make sure the deadlines for paperwork are met and the authorities are informed about the progress of the liquidation process.
  • Pay liquidation costs and the final VAT bill and get the company removed from the companies register.

It is important to know that in a creditors’ voluntary liquidation, the liquidator will act in the interest of the creditors and not in the interest of the directors.

  • When a liquidator is appointed, directors lose control over the company and anything it owns and can’t act anymore for or on behalf of the company. Directors must hand over to the liquidator the company’s assets, records and paperwork, give any information they ask about the company and participate to an interview if asked.

Directors of companies which are compulsory liquidated or under a creditors’ voluntary liquidation process are banned for 5 years from using the same or a similar name for a business they form, manage or promote, except when:

  • they obtain permission from the court to use the name
  • the company they are involved with has been using the same name with the liquidated company for at least a year
  • we are talking about a business being sold by a licensed insolvency practitioner with the legally required notice.