For Directors, investors and other stakeholders, understanding the fate of company assets in the event of an insolvent Liquidation is essential. Liquidation is a legal process triggered when a Company is unable to meet its financial obligations or as a strategic decision by the Directors to close the business.
There are two types of insolvent Liquidation. The commencement of each process differs, but there is no distinction between them as regards the treatment of assets:
- Creditors’ Voluntary Liquidation (CVL): initiated by the Directors when the Company is insolvent and unable to pay its debts. Creditors play a significant role in this process.
- Compulsory Liquidation: initiated by creditors via a Winding Up Petition which leads to a Winding Up Order made by the Court when the Company fails to settle outstanding debts.
The role of the Liquidator
A private sector licensed insolvency practitioner (IP) is appointed as the Liquidator in a CVL. In a Compulsory Liquidation this role is given initially to an official within the Insolvency Service called an Official Receiver, but an IP may be appointed subsequently to take over. The Liquidator’s main duties include:
- Taking control of the company’s assets
- Identifying, valuing and realising those assets
- Settling legal disputes and outstanding contracts
- Distributing proceeds to creditors and, if applicable, shareholders
- Dissolving the company upon completion of distributions to stakeholders
Once the Company is in Liquidation, the powers of the Directors and their control over the Company end, although the Liquidator may ask for their assistance and has the power to compel their co-operation.
What happens to company assets?
Identifying and securing assets
Once appointed, the Liquidator will conduct a thorough review of all Company assets, both tangible and intangible. They will take control of these assets to prevent any dissipation or loss. This may involve such measures as changing locks, moving company property to a secure location and notifying banks to freeze accounts.
Valuation
Before any disposals, the Liquidator will attempt to value the assets, either by instructing independent valuers or relying on recent appraisals. This will provide a guide to acceptable deals, but the reality is that these will be forced sales because the fact of the Liquidation will have to be disclosed to potential buyers. As a result, the realisable value will almost always be below normal open market value and certainly lower than the asset is shown at in the Company’s accounts, often by a significant amount.
Realisation
The Liquidator’s next responsibility is to sell or otherwise realise the assets. This may involve:
- Selling or auctioning physical assets, such as property, vehicles and equipment
- Selling all or parts of the business, if possible
- Collecting outstanding debts from customers
- Negotiating sales of intangible assets, for example intellectual property or brand names
The method and speed of asset realisation will depend on the type of assets and market conditions.
Distribution of proceeds down the payment priority ‘waterfall’
The liquidator must distribute the funds in the strictly regulated order of priority set by UK insolvency legislation.
It’s worth noting that it is extremely unusual for there to be any money for shareholders and the recovery for unsecured creditors is usually very low.
Secured and leased assets
Not all assets used by Company belong unconditionally to it. Assets subject to finance agreements or security interests (including debtors subject to an invoice discounting arrangement) will be excluded from the Liquidation, with ownership reverting to the lessor or lender. The Liquidator will liaise with third party owners to determine whether such assets are to be returned, purchased or otherwise disposed of in accordance with contractual terms.
Intangible assets: intellectual property and goodwill
Intangible assets such as intellectual property (trade marks, copyrights and brand names) and goodwill can have significant value, particularly for technology, creative or brand-driven businesses, even in a Liquidation scenario. The Liquidator will attempt to sell or license such assets to interested parties.
Employee rights and redundancy entitlements
When a Company goes into Liquidation, employment contracts are almost always terminated. Employees become preferential creditors for certain outstanding payments, but some entitlements will also be guaranteed and paid in part by the UK government’s Redundancy Payments Service (RPS), subject to statutory limits.
Legal claims and ongoing litigation
If the Company is involved in ongoing lawsuits or has legal claims against third parties, the Liquidator may pursue these claims if they are likely to result in a net benefit to creditors and if funding to pursue them can be arranged. Conversely, any claims against the Company will be handled as part of the creditor claims process.
Tax matters and HMRC
The liquidator is responsible for addressing outstanding tax matters, including filing final tax returns and settling any outstanding tax liabilities with HMRC, subject to the payment priority waterfall. HMRC may be a preferential or unsecured creditor, depending on the nature of the tax debt.
The final step: the Dissolution of the Company
Once all assets have been realised and distributed, and all matters settled, the Liquidator will apply to Companies House for the Dissolution of the Company. This is the final legal step, after which the Company ceases to exist as a legal entity.
How Directors are affected
Directors must act responsibly in the run-up to liquidation, ensuring that assets are not sold, transferred or concealed in ways that prejudice creditors. The Liquidator has powers to investigate past transactions and may seek to recover assets or reverse transactions that were deemed unfairly preferential or at an undervalue. The potential downsides when Directors breach their fiduciary duties or when they misbehave can be severe.
Directors also have a duty to cooperate fully with the Liquidator, providing unfettered access to records, information and company property. Failure to do so can result in legal penalties or Disqualification from acting as a Director in the future.
At Opus, we have extensive experience assisting business owners and directors with concerns and challenges. We will always work with you to find the best solution for the business. If you would like to speak to Opus, one of our Partners would be more than happy to have a non-obligatory, confidential chat with you. We can be contacted at rescue@opusllp.com or call us on 0203 995 6380 and we will arrange for a call with one of our specialists.