The article will expound more on what liquidation is and how keeping track of the liquidation process and logging it in a Liquidation Report is essential as a company is winding up. The article also comes with 18+ liquidation report samples that you can freely access and download for you to start drafting one of  your own!

What Does it Mean to Liquidate?

Unfortunately, an inevitable reality that businesses have to face is the inability to pay its debts and settle its contractual obligations. This is what it means when a company is insolvent so once your company is in this situation, liquidation is likely to follow right after as a legal and organized course of action for an insolvent business that can no longer continue to function profitably. 

When businesses perform long enough to reach the point of insolvency, infamously termed ‘winding up’ and in some cases ‘dissolution’,  liquidation shall commence which is the first step of a formal process that eventually halts business operations, immediately dismisses all of the employees and shuts down the company altogether. It is a process that in general includes the conversion of all of a company’s assets into cash, meaning the assets are now liquidated, and used to help appropriately pay off the company’s accrued debts with creditors, shareholders and down to its claimants. 

What is a Liquidation Report?

Firstly, it is important that when you take the major leap to liquidate your company, you should seek a liquidation advice from a licensed insolvency practitioner legitimately well-versed in the topic to ensure that you are first of all, doing the right decision for you and your business, and second, to guide you through the whole process as well as come up with expert projections of the steps that should be taken right after. 

The liquidator is then appointed to take over the entirety of the liquidation process and in their arsenal should be a liquidation report that documents why the company has turned out the way it did so it basically finds out how it performed that it has to resort to liquidation. It analyses the actions that the directors of the company took as attempts to avoid having to deal with losses for the creditors or contributed to the influx, or the lack thereof of cash flow of the company.

The report gathers all the necessary information that lead to the company’s insolvency and who was responsible for administering them.  It also contains the details of the company’s assets, liabilities, information on their creditors and transactions as stated in contracts. Basically, the liquidation report has to capture the general overview of the  company’s affairs that contributed to the poor handling of their financials ultimately causing the insolvency and should be presented to the creditors whenever a progress is made or whenever they ask for updates. Creditors should be explained of the financial position of the company through a brief financial analysis as well as state the plans that the liquidator intends to enforce to manage the liquidation process as well as the total length of time until its successful completion. The reports shall be comprehensive and meticulous in detail to determine whether or not repayment is possible. 

It is important that the liquidation reports are submitted to the creditors within 25 working days since the date of liquidation. For voluntary liquidations, the report must be presented to creditors within five working days. 

Solvent vs Insolvent Liquidations

Most liquidations generally involve insolvent businesses that are incapable of paying off their debts in due time and that has been repeatedly mentioned so far. However, it can also involve the closure of solvent companies.

Solvent liquidations, also known as Members Voluntary Liquidation (MVL), occur when the company’s director wishes to close the company for personal reasons, one of which could be their decision to retire from the business scene. Another could be difficulty to function in a market landscape that the business just cannot mesh with or is no longer viable for the business and/or wanting to venture into a new environment to garner more profits and recuperate to generate a marketing plan that will effectively expand the business’ reach. Solvent liquidations are not necessarily due to negative reasons involving financial hardship, in fact, it’s a formal manner to officially wind up a solvent business when it has reached the span of its profitability. Because of this, solvent liquidations allow for the creditors to be repaid within 12 months of closure.

Insolvent liquidations, on the other hand, are when the company simply becomes insolvent or are unable to make the necessary payments when they’re due. Due to the lack of finances and on top of it, the amassed liabilities, creditors can likely receive nothing or receive only a proportion of the repaid debt. 

What is the Role of a Licensed Insolvency Practitioner

As previously mentioned, not only should you seek the advice from a licensed insolvency practitioner that for this situation, functions as a liquidator, but once it is assessed that a liquidation is the only solution, the powers from the company’s directors should be transferred to the liquidator. An insolvency practitioner is authorized and appointed to enact the liquidation process and are usually accountants or insolvency specialists. They are responsible for realizing assets, dismissing employees, dealing with and repaying creditors, distributing the remaining profits to shareholders and ultimately, they are responsible for the closing down of all the offices the business has.

They initially can function to rescue the business where they can offer advice that can help the directors of the company navigate their current situations and overcome what can still be categorized as minor financial inconveniences but if it cannot be helped, their priority should be shifted to the interests of the creditors and likewise, their main role then becomes to ensure that all company’s assets are sold at a reasonable value and are appropriately distributed to the creditor that are well within their respective legal rights. 

Different Types of Liquidation and their Definitions

There are a number of different ways to liquidate a company that although want to accomplish the same result, with the results being the selling of assets to pay debt, satisfying creditors and distribute what is left to shareholders, they are still distinct from each other with regards to the process that should be undertaken by a company that is taking into consideration liquidating its unpledged assets and freeing up funds to pay its debts. Their differences mainly rely on the financial status of the company at the time of liquidation. One type of liquidation has briefly been mentioned to define what a solvent liquidation is. The information below will expound more about what a Members Voluntary Liquidation is as well as two more liquidation types. 

1. Creditors’ Voluntary Liquidation (CVL)

A Creditors’ Voluntary Liquidation is the most common type of liquidation and is performed when it is clear that the company is insolvent and business continuity is more on the hopeless side of the spectrum. This is initiated by the company’s directors and the shareholders of the company who foresee the trajectory of the company’s performances. 

The process officially begins once 75% or more of the company’s creditors vote in agreement to the CVL proposal thus making it legally binding and have to be carried out. An authorized insolvency practitioner is then appointed the role to take over the asset liquidation process and to pay off the debts to the creditors. They are also given the role to settle the company’s legal obligations and can warrant cooperation from the company’s directors. The act of voluntarily initiating liquidation can be a testament to the directors’ prioritizing their creditors; however, they may still be subject to investigation for their actions that lead to the current state of the company. 

2. Compulsory Liquidation

The Compulsory Liquidation is a type of liquidation that occurs with court intervention compelling company liquidation as opposed to a CVL that is voluntary. Court intervention happens once the company’s creditors issue a Winding Up Petition (WUP) which is more or less a sign that a serious legal action is about to take place if the liabilities were to remain unpaid. This means then that company directors are still given the chance to negotiate with their creditors to extend the payment deadline.

In order to repay the creditors within the deadline, businesses may think about selling off their assets however, because part of issuing a winding up petition involves informing other creditors and the company’s bank, freezing of accounts to prevent movements of assets can follow in order for banks to protect themselves from losing any more money from association with the insolvent company which means, businesses may be cut off from having to rely on selling their assets. If the debt remains unpaid, an Official Receiver is designated the role of a liquidator and will then enact the mandatory liquidation procedures and sell off remaining assets for discounted profit which means, there can be little and nothing left to repay creditors. The appointed liquidator is also legally allowed to oblige directors to cooperate and have their actions be investigated to determine whether or not they have performed to contribute to the losses of the company and its overall poor financial situation.

3. Members’ Voluntary Liquidation (MVL)

Mentioned in briefing, Members’ Voluntary Liquidation occurs when solvent businesses decide to formally close the company for reasons such as the retirement of the director and plans to pursue a new business venture. 75% of the company’s members have to vote in agreement to the proposal to liquidate the company and once the votes are in favor of the proposal, a liquidator is once again appointed to settle the company’s debts.

An MVL is the most tax efficient way to wind up a business as it allows for funds to be collected as capital instead of income. Creditors can also be paid in full because assets are greater than the company’s combined debts and liabilities and should there be left over assets, it can be split and distributed among the members. 

What are the Effects of Liquidation on a Company?

Liquidation essentially stops a company from operating which is beneficial if you were in a financial position in which to continue trading only means to accumulate further losses. However, the company is comprised of different sectors that are affected as well and we list the effects on these sectors down below: 

On directors: Directors are asked to comply with mandatory procedures of the liquidation process that will involve their cooperation with the liquidator to navigate the trading details of the company and its business records as well as list down its complete assets for the liquidator to gather and comprehend how the process shall be completed. Transparency is warranted from the directors for the liquidator to perform their job successfully otherwise, they shall face penalties in the form of fines and imprisonment. Other than the business records and assets, the company’s directors shall also provide information on the company’s liabilities, agreements with shareholders and legal claims by or against the company. These are to be filled out and completed in a Statement of Affairs. On employees: Unfortunately for employees, they can’t do much to keep their employment with the company especially if the liquidator determines that the business shall cease operations. While emergency financial assistance is available, it is only limited to certain states and is not a guaranteed provision to all. You can always claim for pays that your employer owes you and this will be distributed by the office assigned to take responsibility for this kind of situation. Such pays include: maternity pay, sick pay, paternity pay and adoption pay. However, keep in mind that you may or may not be paid in full plus it may take awhile before you are completely compensated but even then, it still might not be in full. In the end, employees will be asked to seek employment elsewhere.On creditors: Depending on the kind of liquidation, the impacts of the business liquidation can vary. Unless unsecured creditors seek for court intervention or a liquidator, they cannot take legal action against a company going through the process of liquidation. While their interest becomes the top most priority of a liquidator when it is hopeless to recover from the insolvency in the sense that the company’s assets are sold off to repay them, creditors may still not be repaid in full. For a voluntary liquidation, creditors can expect full repayment. On the business: Sometimes, businesses can be threatened with liquidation by a vindictive creditor who seeks for the repayment of debts and while to an extent, they have all the legal means to go extreme, they just really want for the company to repay what is owed. If the parties come to a mutual agreement to postpone the deadline, then there should be no fear of business liquidation assuming that you have collected enough funds from selling assets to repay the debts. If not, then business liquidation is the only solution and a liquidator should be sought to manage the process and ensure that all assets are sold off to try and repay the company’s debts. The end scenario to this would then be the closure of your business and your powers as director removed.

FAQs

What Debts are Written Off on Liquidation?

The following debts are written off on liquidation:

  • Trade suppliers
  • Utilities
  • Value-Added Tax (VAT)
  • Corporation Tax
  • Unsecured bank debt
  • Business rates
  • Arrears of pay, redundancy and tribunal claims

Why do Businesses Go Into Liquidation?

Businesses go into liquidation when they are struggling to pay off their debts in a timely manner or if business liabilities exceed total assets. Some businesses also go into liquidation to close down an insolvent company so they can avoid further losses especially when they are aware that pushing to trade still will worsen the financial standpoint of the company and accrue more liabilities.

What is a Liquidation Report?

A liquidation report gathers all the necessary information from the liquidated business such as its assets, business records, creditors, shareholders and the company’s liabilities. It should depict what the plans of the liquidator are to manage the liquidation and for how long the process shall go until it is completed.