Why Would a Company Go into Liquidation?

Companies can cease trading for a variety of different reasons.

When they do, they must undergo a winding-up process, which involves liquidation.

This article explores the purpose of company liquidation and how it affects various parties attached to the company.

Why would a company be liquidated?

To explore why a company goes into liquidation, it’s important to understand what company liquidation is.

The liquidation process involves winding up a company’s affairs, selling company assets and settling its debts, ultimately removing it from the Companies House register.

Entering liquidation isn’t an easy decision.

The main reason for liquidation is company insolvency – being unable to repay debts while liabilities outweigh the value of assets.

Insolvency and liquidation tend to go hand in hand, as liquidation is used to help repay any debts a company owes to its creditors.

What causes a business to go into liquidation?

Financial difficulties, mainly insolvency, is the main reason for liquidation.

An insolvent company can undergo one of two types of liquidation:

• Creditors’ Voluntary Liquidation is when company directors decide to liquidate an insolvent company with no prospects for recovery
• Compulsory Liquidation is a court-ordered process usually initiated by a petition from the company’s creditors

Although insolvency is the driving force for many companies to cease trading, it isn’t the only reason for liquidation.

Members’ Voluntary Liquidation sees solvent companies closing their doors usually for retirement or restructuring and liquidating their assets to repay shareholders.

Therefore, a company doesn’t have to be experiencing financial difficulties to resort to liquidation.

What impact does liquidation have on directors and shareholders?

Often, when one reflects on the reasons for liquidation and the liquidation process, the focus is on creditors.

Liquidation is a means for them to recoup money owed.

However, company liquidation also affects the directors and shareholders of a company.

Directors play a crucial role in the liquidation process.

Indeed, creditors’ voluntary liquidation and members’ voluntary liquidation are both initiated by directors.

However, compulsory liquidation also sees an official receiver or liquidator take control to manage the sale of assets and distribution to creditors.

The liquidator will also investigate the company’s operations. If they discover any wrongdoing by the director/s, the director/s can be held criminally or civilly liable, which could result in fines, court orders for repayment, or disqualification from being a director at another company.

Shareholders of a company undergoing liquidation don’t play such an active role in the liquidation process.

While shareholders have a vote in company operations, during company liquidation they are awaiting repayment on their investment, alongside creditors awaiting debt repayment.

Unfortunately, shareholders often don’t receive repayment because debt repayment takes priority over repaying shareholders.

Due to insufficient funds, there may be very little, or no money left to repay shareholders their investment.

Whether you’re looking to liquidate your company due to financial hardships or for a fresh start, it’s important to have the expertise of a trained insolvency practitioner by your side.

Irwin Insolvency has more than 20 years’ experience guiding companies through the liquidation process.

For more information, contact us by telephone at 0800 254 5122 or by email at mail@irwinuk.net