What happens when a company goes into an insolvent liquidation?
If your company is no longer able to pay its debts, you should be considering placing it into liquidation, or possibly another regulated insolvency process. However, before doing so, it's important to understand the legal and financial implications.
Insolvent liquidation is a regulated process used to wind up a company that cannot meet its financial obligations. It often follows a period of financial distress, and while it's seldom an easy decision, acting early and getting professional advice from a regulated professional can help protect directors and creditors alike.
This article explains what happens when a company goes into insolvent liquidation, including director obligations and how the process unfolds.
What is liquidation?
Liquidation is the legally regulated process used for closing a company, realising its assets and distributing the proceeds to creditors and shareholders. Once the process is complete, the company is removed from the Companies House register and will cease to exist.
Liquidation can be voluntary (initiated by the company/shareholders) or compulsory (following the issue of proceedings by creditors/the company in the courts). In all cases, an authorised insolvency practitioner must manage the process.
What is insolvent liquidation?
Insolvent liquidation is the formal closure of a company which cannot pay its debts in full. Once the process begins, the company will cease trading, and its assets will be sold by the liquidator. The net proceeds will be used to repay creditors. The company is then dissolved.
Both routes involve the appointment of a licensed insolvency practitioner, who takes control of the process and ensures it is carried out in line with the law.
Types of insolvent liquidation
Creditors’ voluntary liquidation (CVL)
This is a common route for insolvent companies. Directors initiate the process after taking advice from an insolvency practitioner. It’s typically when:
- The company has no realistic prospect of recovery
- The directors want to minimise further creditor losses
- Assets need to be realised in an orderly fashion
- There is a desire to avoid a court-led process (not necessarily)
Directors call a shareholders’ meeting and a creditors’ meeting to appoint a liquidator, who will take control of the assets and realise them. The net proceeds are then distributed by the liquidator in accordance with the statutory order of priority. Shareholders will get nothing unless creditors are paid in full.
Compulsory liquidation
This process is initiated by a creditor through a winding up petition presented to the court. A winding up hearing takes place and if the winding up order is granted, the Official Receiver is appointed liquidator. The Official Receiver is the government department that initially deals with all compulsory liquidations.
Why might a company go into insolvent liquidation?
Common reasons include:
- Cash flow pressure
- Overwhelming creditor pressure
- Loss of key contracts or revenue streams
- Inability to meet tax liabilities or payroll
- Formal creditor action (e.g. a winding up petition)
- Any other event or development which renders the company unable to pay its debts as and when they fall due
It’s not uncommon for directors to try pursuing recovery options first, but if those fail or the business becomes unviable, liquidation may be the most appropriate way to draw a line under the company’s affairs. In all cases, it is vital that management take formal advise from a Licensed Insolvency Practitioner. If they don’t, they risk personal liability.
What happens during the liquidation process?
1. Insolvency practitioner is appointed
The liquidator takes legal control of the company. The liquidators’ responsibilities include securing and realising the assets, communicating with creditors, and reporting to the Insolvency Service on the conduct of officers.
2. Company ceases trading
The company stops operating immediately unless the liquidator deems continued trading necessary to preserve value. Employees are typically made redundant, and contracts are terminated.
3. Assets are sold
All assets - such as stock, vehicles, property and intellectual property - are sold. The goal is to maximise the return for creditors.
4. Creditors are repaid in order of priority
Funds are distributed in this order:
- Secured creditors (e.g. banks with fixed charges)
- Preferential creditors (e.g. employee wages)
- Secured creditors with floating charges
- Unsecured creditors. In the rare event of a surplus to creditors, this will be returned to shareholders.
5. Investigations into director conduct
The insolvency practitioner will submit a report to the Insolvency Service reviewing the officer's conduct. If there’s evidence of poor conduct, directors may face disqualification. In severe cases, directors can be held personally liable for the company’s liabilities.
6. Company is dissolved
Once all assets are dealt with and reporting is complete, the company is removed from the Companies House register.
What does insolvent liquidation mean for directors?
Insolvent liquidation can be stressful for directors. Although it doesn’t always mean personal financial consequences, there are legal duties and risks to be aware of:
- Fiduciary duties continue even when the company is failing - you must prioritise the interests of creditors and you must cooperate with the Liquidator.
- Wrongful trading - continuing to trade when you knew (or ought to have known) there was no reasonable prospect of avoiding insolvency - can lead to personal liability.
- Personal guarantees - if you’ve signed personal guarantees for loans or supplier contracts, you will be personally liable notwithstanding liquidation.
- Director disqualification - serious misconduct could result in a ban from acting as a director.
Seeking early advice is the best way to mitigate this risk.
What happens to employees?
Employees are usually made redundant as part of the process. They may be entitled to claim the following from the government’s Redundancy Payments Service:
- Statutory redundancy pay
- Up to 8 weeks’ unpaid wages up to the statutory limits.
- Accrued holiday pay
- Notice pay
The insolvency practitioner will provide information and support to help employees make their claims.
How can an insolvency practitioner help?
Insolvency practitioners are licensed and highly regulated. They must ensure the insolvency process is carried out fairly and legally. Their role includes:
- Advising directors on their responsibilities
- Managing asset sales and creditor distributions
- Liaising with HMRC, employees and secured lenders
- Submitting conduct reports to the Insolvency Service
Importantly, they can also help directors understand if liquidation is the right route or if another option (such as administration or a Company Voluntary Arrangement) could be more suitable.
When should I speak to an insolvency expert?
If your company is unable to pay its debts, is facing pressure from creditors, or has received a statutory demand or winding up petition, it’s essential to seek advice straight away.
Early action improves your options and may help you avoid personal exposure. Waiting too long can lead to personal liability.
Azets has a team of experienced insolvency practitioners across the UK who can provide discreet, practical advice tailored to your situation.
What if the company has a defined benefit pension scheme?
If your company has a defined benefit (DB) pension scheme in deficit at the point of insolvency, this adds a layer of complexity and regulatory scrutiny to the liquidation process.
When a company with a DB scheme enters insolvent liquidation, the scheme is typically assessed for entry into the Pension Protection Fund (PPF). The PPF may step in to provide compensation to members, but only if the scheme meets certain eligibility criteria.
As a director, you should be aware that:
- The Pensions Regulator may investigate the conduct of directors where a pension scheme has been underfunded.
- In certain circumstances, contribution notices or financial support directions could be issued.
- Early engagement with pension trustees and the Pensions Regulator is strongly advised to minimise risk.
If your business sponsors a DB pension scheme, seek specialist advice before proceeding with any insolvency process.