Quick guide to liquidation

Liquidation applies predominately to a limited company, but it can also apply to a partnership.

What happens in a liquidation?

If a company enters into liquidation, it means that it will have to stop trading immediately and have a licensed insolvency practitioner (called a liquidator) appointed to sell the company’s assets in order to repay as much as possible to the creditors.

There are two types of liquidation:

  • Creditors’ voluntary liquidation: the directors decide it is time to liquidate the company. A licensed insolvency practitioner is required to help them to do this.
  • Compulsory liquidation: where the company is pushed into liquidation by an unpaid creditor that’s owed more than £5,000. This can be defended if you have a valid dispute or counterclaim.

Once the liquidator is appointed, all of the directors’ powers cease, and they cannot access the company’s bank account or run the company. Sometimes, a liquidator will ask the former directors for help with various matters. Directors have a legal duty to cooperate and assist the liquidator in their duties without being paid. Failure to cooperate may mean a director is prosecuted by the Insolvency Service.

How long does it take to go into liquidation?

There are three stages to get into voluntary liquidation. The quickest possible time to do this is within eight days. There is no longest time, however the average time is about 15 to 18 days.

The first stage is that a majority of the board of directors agree that liquidation is the right option. The directors can call a meeting to decide this without any minimum notice period, as long as all the directors have been invited to the meeting. This is easy when there are just one or two directors.

The second stage is that shareholders must be given 14 days’ notice of the resolution to liquidate. This can be reduced to immediately if 90% of the shareholders agree.

The third stage is that creditors must have at least seven clear days’ notice of the creditors meeting.

How long will the liquidation last?

There is no legal specified time limit in place of how long it can take. A typical liquidation takes a year to complete, but can go on for longer. It depends on what assets have to be realised, and how long it takes to agree creditors’ claims.

See also: Why choose a liquidation process?

About the author

David Kirk is a chartered accountant and licensed insolvency practitioner based in the south west. Follow @kirksinsolvency or visit www.kirks.co.uk.