What happens during the company liquidation process

15 June 2014

A company is in liquidation when a liquidator is appointed over the affairs of the company and has the effect of removing the Directors from office and the Liquidator becomes the authorised person who can deal with the assets, liabilities, bank accounts and company employees.

Who can be Liquidator

The Insolvency Act 1986 specifies that in order to be a liquidator a person must be authorised by the Department of Trade and Industry (DTI).

Creditors

Creditors will be paid from any surplus and in a certain order of priority.

  • Fixed Charge Holders like the Bank who have Mortgages over properties, Debentures over book debts, Hire Purchase companies who have financed vehicles and equipment. The fixed charge holders are paid first, out of the realised assets they have a charge over.(Lenders with Personal Guarantees will then call those PG’s in, to cover any balance shortfalls)
  • Reservation of Title: any assets, once ownership is proven to the liquidator, can be claimed back by the Title holder.
  • Preferential Creditors will be paid next from any surplus .They include VAT, NI, PAYE and employees with arrears of wages and holiday pay. Any Redundancy payments due, are paid directly by the National Insurance Fund, upon application.
  • Floating Charge Holders will be paid next from any surplus; normally creditors with a charge on stock and work in progress.
  • Unsecured Creditors will then be paid from any surplus remaining.
  • Shareholders will only be paid, once all other creditors have been.
Pre-Pack Liquidation

A pre-pack liquidation and a pre-pack administration essentially achieve the same result, using a different mechanism.

In a pre-pack liquidation, a new company (A Phoenix company) is formed and the assets of the old company would be transferred to the new company via a CVL-Creditors Voluntary Liquidation.

Each case is unique, but the steps taken in a pre-pack liquidation would normally be as follows:

  • An overview of the company’s financial situation is carried out, the directors future plans are examined and any time critical events identified.
  • Any insolvency legislation affecting pre-pack liquidations will be explained in detail. For example: transferring employees or the re-use of the old company name (Section 216- the use of a prohibited name)
  • Depending on the asset value to be transferred to the new company, a Valuer would be instructed by the IP. However, if the assets are less than £10,000.00 and of little commercial benefit the IP would make a judgement. If the Directors are worried a rival company may want to purchase the assets, it is clear that the correct procedure must be followed.

NOTE: A “Statement of Insolvency Practice” (SIP16) introduced in January 2009, details legislation an IP must follow when dealing with a Pre-Pack Administration. SIP16 does not apply to Liquidations

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