If, as director, you’ve had to consider closing your limited company through an insolvent liquidation, you might have some concerns and questions around what to do next or what will happen to you, or the company’s staff.

What’ll happen to company staff in liquidation?

As liquidation closes the limited company in question, all company staff are made redundant during the process. They also become preferential creditors of the company. Preferential creditors rank above unsecured creditors; suppliers, contractors, customers, etc., but below secured creditors with fixed charges over assets like premises, vehicles, and equipment. If funds are left after those creditors, including certain payments to HMRC, and the insolvency practitioner, are paid, the company’s employees will receive some remuneration. If the company lacks the funds for payment in lieu of notice, pro-rata holiday pay, unpaid wages and redundancy pay, the Redundancy Payments Service can help.

The company can’t afford to liquidate

The cost of liquidation could cause concern, especially if the company’s financial situation is so dire that it may be the only way to alleviate its debt. As a result, you may be tempted to dissolve the company as you would with a solvent one. While this isn’t illegal, dissolutions are published in the appropriate Gazette, and the company’s creditors can object. There are ways to fund a liquidation, even if you’re worried your company can’t afford it. Options range from selling company assets to personally raising funds off your own back. If directors are entitled to redundancy pay, that could also help fund the liquidation.

Can creditors force a company into liquidation?

As unpleasant a prospect liquidating a company may seem, it is often preferable to having liquidation forced upon it. If a company owes a creditor more than £750, that creditor can apply for a winding-up petition. If approved by the court, this becomes a winding-up order, freezing the company’s bank accounts and making trading impossible. Unless you can get a validation order passed, the company will go into compulsory liquidation, with trading ceasing immediately.

While these circumstances sound bleak, compulsory liquidation may offer a solution if you cannot raise funds for voluntary liquidation. Directors can invite the company’s creditors to issue a winding-up petition, closing the company. While it offers the directors less control of how they enter the process than voluntary liquidation, it can close the insolvent company and draw a line under the debt if no other options are feasible.

Can directors start another company after liquidation?

Having to liquidate a company is seldom a pleasant experience and could leave a bad taste. However, having a company close through an insolvent liquidation doesn’t automatically disqualify directors from setting up another limited company. While a liquidator will investigate director actions leading up to and during the insolvent period, if no instances of wrongdoing are found, the director can start a new limited company. However, strict rules and regulations exist around reusing similar elements (like the name, assets, and trading style) in a new company.

To summarise

While closing a company can be a daunting prospect, and you might have concerns about affording the process, there are ways of obtaining the funds. You can either enter liquidation voluntarily once

you’re aware that the company cannot repay its debts; otherwise, your creditors can force the company into liquidation once you owe them more than £750.

There are several ways to fund a liquidation, including funds generated from selling the company’s assets once they’re independently valued, using directors’ redundancy pay, or raising funds personally. Staff are made redundant in liquidation, becoming preferential creditors in the process. If you still want to run a business after the liquidation, you can set up a new limited company if the liquidator finds no evidence of wrongdoing.