Liquidation is a practice commonly used by directors for many reasons. It is a tool that cleanly wraps up a company, realising retained profits for future ventures or retirement, or closing down an insolvent company while upholding obligations to creditors. No matter your situation, company liquidation can prove a very useful tool indeed.
However, although liquidation is known to be useful for directors and creditors, what happens to shareholders when a company is liquidated?
In this article, Clarke Bell will answer this question, discussing what liquidation means for shareholders, and how they might be affected.
What is company liquidation?
Company liquidation refers to a series of procedures that result in the closing of a company and the liquidation of its assets.
There are three main procedures that can be used depending on a company’s financial state: Members’ Voluntary Liquidation (MVL), Creditors’ Voluntary Liquidation (CVL), and compulsory liquidation. An MVL is available for solvent companies, a CVL is available for insolvent companies, and compulsory liquidation tends to occur when a company’s creditors lose faith that they will receive repayments, and opt to serve the company with a winding-up petition.
Although each of these procedures has differences in features, they all follow the same throughline. An insolvency practitioner will be appointed to head the procedure, assets and accounts will be recorded, then liquidated, with the proceeds going to the appropriate parties. Then, the company will be wound up and struck off from the Companies House register. At this point, directors will no longer be tied to the previous company, and are free to pursue other ventures.
Once a company enters liquidation, the trading of its shares is halted. These shares will then be “deemed worthless”, a term given to shares in companies that no longer exist. Shareholders who own shares in such a company can declare them as a capital loss, which can result in paying less income tax. Once the necessary records have been made, the shares can be removed from a shareholder’s portfolio.
While shares of liquidated companies are deemed worthless immediately, the same is not necessarily true for companies entering administration. Although it often acts as a step towards liquidation, administration does not have such a devastating impact on the value of shares and the portfolio of shareholders.
When entering into administration, a company typically has roughly one year to complete the administration process. During this time, the administrator has a few options to consider. Namely, they must work to either implement a business rescue plan and get the company back on track, sell the company to recover some investment, or downsize to a more manageable size and dispose of redundant or expensive business assets. If the company cannot be rescued, sold, or downsized to a point where it can continue trading, then it will likely enter liquidation.
Assuming the company is not liquidated, shareholders can have a favourable result. If the company continues to exist in some form, either by implementing an effective business rescue plan, or by downsizing and cutting costs, then the company’s shares will retain some value. It may not be as much as previously, with the exception of an exemplary turnaround, but shareholders won’t leave empty-handed. If the company cannot be salvaged and must be liquidated, then the shares will be deemed worthless, and shareholders will walk away with nothing.
When, or if, shareholders get paid during liquidation depends on the specific procedure and the company’s financial state. Funds raised as a result of the liquidation of company assets will be distributed according to a payment hierarchy, with shareholders occupying the bottom rungs.
If a company enters into a Creditors’ Voluntary Liquidation, then shareholders are far less likely to see their investment than they would during a Members’ Voluntary Liquidation. This is due to creditors taking precedence in a CVL and, as the company is insolvent, it is unlikely that it has the funds or assets to repay these creditors in full, let alone distribute any to shareholders.
Assuming a company enters liquidation with outstanding creditors along with shareholders, repayment of these obligations will follow a set order:
- secured creditors, namely providers of loans that are secured against company assets
- preferential creditors, typically HMRC / unpaid taxes, employees, and tort victims, should any exist
- unsecured creditors, namely providers of loans that are not secured by company assets
- shareholders. Understandably, shareholders seldom receive anything once the repayment order finally arrives at them. In the rare cases that funds are still available at this point, then shareholders will receive money in accordance with their number of shares.
Closing a company through other means
If company liquidation is not appropriate for your position, it may be best to close using dissolution instead. This method is particularly effective at closing smaller companies without large reserves of retained profits. This allows directors to save on the cost of liquidating through one of the aforementioned procedures, and is especially useful when splitting a small pot amongst a few shareholders.
Company dissolution can be initiated voluntarily by directors – of a solvent company – with the filing of a DS01 form. This form costs £8 if submitted online, and £10 if done in paper format. Once the process is underway, a notice will be posted in the Gazette. This makes your intention to close your company public, allowing related parties, such as creditors, to obstruct the procedure. Assuming none come forward, you may carry out the process, disposing of company assets or transferring them, and emptying company accounts. Anything that remains after the company has been removed from the Companies House register will be considered “bona-vacantia”, or without an owner. As assets cannot be owned by something that does not exist, they will be transferred to the Crown. Once the company is dissolved, you can divide the retained profits amongst shareholders and continue to future ventures.
Clarke Bell can help
If your company is struggling with its financial position, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the best solutions to their financial problems, whether it be a business rescue plan, liquidation, or otherwise, and we can do the same for you.
We can also help you if you are thinking about closing your solvent company using the very tax-effective Members’ Voluntary Liquidation (MVL) process.
Contact us today for a free, no-obligation consultation and find out what we can do for you.