Qs & As FOR COMPANIES

1. What is a Liquidation?
2. What is the role of a Liquidator?
3. Who appoints a Liquidator?
4. How do I put my Company into Liquidation?
5. As a director will I be liable for any of the company's debts?
6. How do I register a complaint against a licensed insolvency practitioner?
7. Who pays the Insolvency Practitioner?
8. What if a company has no assets?
9. What is a proxy and how does it work?
10. What happens to the employees in a company after liquidation?
11. How do I make a claim?
12. If a dividend is likely, how long before I receive it?
13. How are creditors informed about a company in liquidation?
14. What happens at a creditors’ meeting and is it important to attend such meetings?
15. Other types of creditors' meetings
16. What is wrongful trading?
17. Is there an alternative to liquidation if I have a cash flow problem?

1. What is a Liquidation?

A Liquidation is the end of a company’s life and it is the most common procedure used here in the UK. The company usually ceases all trading activities at the point in which the directors consult with a licensed insolvency practitioner or after the shareholders have passed a resolution to place the company into liquidation.

There are three main types of liquidation:

• Creditors Voluntary Liquidation (CVL) - this arises when the directors of the company decide that the company can no longer continue to trade due to its insolvent position and take steps to consult with a licensed insolvency practitioner to convene a meeting of the company’s creditors.
• Members Voluntary Liquidation (MVL) - in this situation, the company is able to pay its debts in full and wishes to cease its trading activities. The circumstances giving rise to such liquidation may be as a result of the shareholders of the company wishing to realise their investment. Alternatively, it may be that a group of companies wishes to restructure and reorganise and some of the companies in the group may be no longer be required or may not fit into the core business of the group. In such cases, the shareholders will make use of this method of disposal to tidy up the loose ends.
• Compulsory Liquidation - this type of liquidation arises when the court makes a winding up order on the petition of an unpaid creditor, or, the company itself can petition the court to be wound up.

2. What is the role of a Liquidator?

The liquidator’s role is to act in the best interests of all creditors (secured, preferential and unsecured) when realising the company’s assets. He will authorise the sale of the company’s assets and ensure that the best price is received. The funds held by the liquidator are then distributed firstly to the secured creditors and then to the preferential and unsecured creditors (the trade creditors) The liquidator also has the power to investigate all aspects of the company’s life including the actions of the directors. He must also prepare a report on the conduct of the directors, for submission to the Department for Business, Enterprise & Regulatory Reform within 6 months of the appointment, and to bring about the appropriate proceedings if they have committed an offence under the insolvency act 1986.

3. Who appoints a Liquidator?

In the case of a CVL, the shareholders pass a resolution to wind up the company and appoint a liquidator. At a subsequent creditors meeting, the creditors can then either confirm the shareholders nomination or appoint their own liquidator by voting in person or by proxy. A liquidator must be voted in by a majority (by value) of creditors.

4. How do I put my company into liquidation?

This is a very straightforward process. You will need to consult with a licensed insolvency practitioner (IP). Your accountant will be able to guide you as it is most likely that he will already have established such contacts for other clients. Once you have made contact with the IP, you will be guided through the process. It should be said that the earlier you contact the IP, the easier it is to gather all relevant information and prevent any creditor from commencing legal action particularly in such instances where you have already received a writ or summons.

5. As a director will I be liable for any of the company’s debts?

If, as a director, you have given personal guarantees to secure your financing of say, the company’s overdraft or loan account, then the lender will look to recover the balance owing if the funds available from the realisation of the assets are insufficient to settle the debt.

6. How do I register a complaint against a licensed insolvency practitioner?

Any complaints regarding a license holder should be notified to the license holder’s regulating body. If you wish to make a complaint you should ask for the details of the particular regulating body. Here is a shortlist for ease of reference:

The Association of Chartered Certified Accountants (ACCA) www.accaglobal.com
The Institute of Chartered Accountants in England and Wales (ICAEW) www.icaew.co.uk
Insolvency Practitioners Association (IPA) www.ipa.uk.com
The Law Society www.lawsoc.org.uk

7. Who pays the Insolvency Practitioner?

In the case of a CVL, the IP receives his fees from the sale of the assets of the company. Fees are usually calculated on a time-cost basis and are made known to creditors when annual reports are sent. In case of administrative receiverships, the IP’s fee is negotiated with the floating charge holder making the appointment.

8. What if the company has no assets?

If the company has ceased to trade, you, as a director, could approach an IP and discuss the matter of fees for the preparation of work involved in calling the creditors’ meeting. The IP will be able to tell you what costs are involved and how much you will be required to pay.

9. What is a proxy and how does it work?

A proxy is a formal instruction to a named individual or the chairman of the meeting to vote on behalf of the creditor at the meeting. The proxy must be lodged (in the case of a CVL) at the place and by the time specified in the formal notice of the meeting, which accompanies the proxy form. The creditor may complete the proxy form in a particular way setting out exactly how he/she wishes the vote to be cast or, the creditor may chose to allow the named proxy holder to use his/her discretion at the meeting. Click here to download a sample Proxy form.

10. What happens to the employees in a company after liquidation?

The Government will meet various employee entitlements, but subject to limits which are periodically revised. These claims are all paid by the Department for Business, Enterprise & Regulatory Reform which then claims as a creditor in the liquidation. The employees are usually given a leaflet by the licensed insolvency practitioner, which explains the whole process. For more information on this subject visit the following link – www.insolvency.gov.uk

11. How do I make a claim?

Creditors will be notified by the Licensed Insolvency Practitioner who has been appointed by the shareholders, giving details of the time and place of the creditors meeting. Creditors will also be requested to complete a “proof of debt” form along with a proxy form. The statement of claim forms the basis upon which a dividend (where dividends are payable) is calculated.
Click here to download a sample Proof of Debt form.

12. If a dividend is likely, how long before I receive it?

This is largely dependent upon the complexity of the case. In certain instances liquidation may last several years. Where litigation is involved, it may also take a long time to agree the claims of creditors, in matters relating to tax (Inland Revenue, VAT). However, where the case is relatively straightforward, a liquidator would seek to close a case within a period of twelve months.

13. How are creditors informed about a company in liquidation?

If you are a creditors listed in the books and records of the company, you will automatically receive a formal notice of the meeting together with a proxy for and a proof of debt. You should lodge your claim at the address shown on the form, (usually the address of the licensed insolvency practitioner instructed to convene the meeting) regardless of whether you wish to vote or not.

14. What happens at a creditors’ meeting and is it important to attend such meetings?

A creditors’ meeting gives you the opportunity to attend and receive information about the state of the company and question the directors and vote for or against the nominated liquidator. If the liquidator holds over 50% in value of the total trade creditors, he will remain in office as liquidator. You may also request to sit on the liquidation committee (in the case of a CVL).
Creditors should note that there are occasions when it is important to have professional representation at creditors meetings. Barringtons will be happy to attend meetings on your behalf where your debt is substantial.

15. Other types of creditors’ meetings:

• In administrative receivership - the creditors will be presented with a report prepared by the administrative receivers, which will give an overview of their involvement since their appointment. The report will contain details of the company’s current financial situation and an estimate of likely dividend available for creditors, wherever possible.
• Company Voluntary Arrangements - a creditors’ meeting is called to enable creditors to vote for or against the company’s proposals with or without modifications.
• Compulsory Liquidation - This is the same as a CVL except that directors will not be present. However, Official Receiver will give creditors a copy of the report he has prepared, detailing the assets and liabilities of the company.
• Administration - at these meetings creditors will receive a full report of involvement of the administrator(s) since his appointment. They will also be asked to vote on proposals to decide on the exit route for the company in administration.

16. What is wrongful trading?

Under the Insolvency Act 1986, it is an offence for a director of the company to continue to trade whilst knowingly insolvent. It does not mean that the director should cease to trade immediately but he ought to take steps to reduce the losses to creditors. The best protection a director can have in this situation is to seek advice at an early stage. Otherwise a civil action may be brought against directors of companies who have failed to take the necessary steps to minimize losses to creditors when they knew or ought to have known the insolvent state of a company.

17. Is there an alternative to liquidation if I have a cash flow problem?

Yes, there is a process called a Company Voluntary Arrangement (CVA) and this is widely used here in the UK as a method by which a company can trade out of its difficulties, given the right set of circumstances. This process enables you to spread your repayments over a period of time and to offer a reduced payment to your creditors, if the company cannot afford to pay them in full. The acceptance by creditors of the company’s proposals will depend on a variety of factors. However, most creditors are prepared to help, provided the company can show that it has a real chance of meeting its proposals to creditors.