Step 1: Decision made to close the company

Normally it will be the directors of the company who agree to initiate a creditor’s voluntary liquidation to ensure that their position as directors is protected.

The directors pass a special resolution stating that the business is insolvent and should be closed. A special company resolution is signed to formalise the process.

The directors will appoint an insolvency practitioner who will act as liquidator until this appointment is agreed by the creditors at a creditor meeting. 

Step 2: Liquidator Appointed

The first job of the insolvency practitioner is to call a creditors meeting at which a liquidator will be formally appointed. This is commonly known as the section 98 meeting. The meeting must be chaired by a director of the company.

All creditors as it is reasonably possible to identify and communicate with must be given notice of the creditors meeting. The insolvency practitioner must also advertise the fact that the company is to be liquidated in the London Gazette and in the local newspaper where the company has its principle place of business.

If the company has no creditors who hold charges or debentures over its assets, it is normal for the insolvency practitioner introduced by the directors to be appointed as liquidator. However, a debenture holder such as a bank may wish to appoint its own approved liquidator at the creditors meeting.

Note: None of the company’s assets may be sold until the liquidator has been appointed at the creditor meeting.

Step 3: Employees made redundant

One of the first jobs undertaken by the liquidator is to make the employees of the company redundant. Generally employees are not given any statutory notice and dismissed immediately. However, the liquidator may keep on some employees for a limited period if he or she feels that this will help preserve the value of any of the company’s assets before they are sold.

Because the company is insolvent, there may not be enough funds to pay redundancy packages to the employees. Where this is the case, employees will be treated as preferential creditors and receive payment from any funds available after the liquidator has taken their fees.

However, employee’s preferential redundancy pay will be limited to £800. After that any outstanding amounts will be treated as standard unsecured creditors. For this reason, employees will often not receive all the money they are owed.   
Given that all redundancy notices and payments will not be made as per the employee’s terms and conditions of employment, employees could have the right to launch a claim for unfair dismissal against the company. However, this is not usual as the company is insolvent and any such awards will remain unpaid. 

Step 4: Assets Liquidated and Creditors Paid

The liquidator will ensure that a valuation is undertaken of all of the company’s assets including and buildings, stock and equipment.

All of the assets will then be sold for a reasonable market price. After the liquidator’s fees and employee’s statutory payments are paid, any remaining cash will be distributed to the company’s creditors.

Normally the company’s creditors will be paid a small proportion of what they are owed if anything at all.
 

Step 5: Liquidator reports on directors

The liquidator has a duty to make a report on the conduct of the directors of the business. The report is known as the director’s disqualification report (or D1 report).

The report will be issued to the insolvency service and will state whether or not in the liquidator’s opinion, the directors have acted properly. If not, the report may recommend that further investigation is required by the insolvency service.