Liquidation is the formal
insolvency process for closing a Supplier, whether voluntary or compulsory. It
is primarily geared towards realising Supplier assets for creditors and
dissolving the Supplier from the Companies Register.
To enter into liquidation, a
business must appoint a qualified Insolvency Practitioner as an appointed
liquidator. There are primarily three types of liquidation:
- Creditors’ Voluntary Liquidation:
This occurs when a Supplier can no longer pay its liabilities or continue
trading and is insolvent. The directors must commence a decision-making
process and instruct an insolvency practitioner to place the Supplier into
liquidation before handing over Supplier control to a liquidator.
Shareholders must hold a general meeting to vote for a resolution to wind
up the Supplier.
- Members Voluntary Liquidation: This
process applies to a Supplier that is still solvent and able to trade, but
the directors need to close the Supplier down. There must be sufficient
value left in the Supplier’s remaining assets to pay the debts owed to Supplier
creditors with statutory interest.
- Compulsory Liquidation: This form
of liquidation involves a Supplier being taken to court. It occurs when a
winding-up petition has been issued due to a debt that has not been
satisfied and is owed to a supplier's creditor. The petition is heard at a
hearing where a court judge can make a Winding-Up Order to place the
Supplier into Compulsory Liquidation.
An Insolvency Practitioner
(IP) is licensed in the UK to act for companies and individuals facing
insolvency or acute financial distress. When an IP is appointed over a Supplier
in Creditors’ Voluntary, Compulsory or Members’ Voluntary Liquidation, they are
referred to as the Liquidator.
In a Creditors’ Voluntary or
Compulsory Liquidation, a liquidator will take control of a Supplier when it
enters liquidation, usually because the Supplier cannot pay its debts in full.
A liquidator must be a qualified Insolvency Practitioner with the power to
undertake any activities required to wind up a Supplier’s affairs.
When a Supplier enters
liquidation, the Liquidator, who has the appropriate powers and duties, will
typically go through the following initial steps:
- Investigation: All Supplier
information, including all Supplier books and records, details of assets,
cash and book debts, and non-physical assets, is collected and collated
thoroughly.
- Compile a List of Creditors:
Directors must provide a complete list of creditors detailing the money
owed, with their names and addresses.
- Inform Creditors: The insolvency
practitioner will inform the creditors listed of the Supplier's position,
usually through a formal insolvency notice.
- Asset Valuation: The insolvency
practitioner will value all Supplier assets that will be realised for the
benefit of creditors.
- Staff Management: The insolvency
practitioner has a legal duty and is responsible for making staff
redundant and assisting with employee financial claims.
Within a month of the
Supplier ceasing to trade, a creditors' meeting will be held if the business
cannot continue trading and liquidation has been decided as the best option.
The appointment of an Insolvency Practitioner will be confirmed during the meeting.
During a Supplier’s voluntary liquidation process, it is the legal duty of the
Supplier's Directors to:
- Provide all Supplier information to
the Liquidator.
- Attend any meeting requests with
the Liquidator.
- Hand all Supplier assets to the
Liquidator.
- Grant access to the Liquidator to
Supplier trading records, books, records, bank statements, insurance
policies, employee records, and all Supplier's assets and liabilities
documents.
Once the liquidator has
circulated the final supplier liquidation report, shareholders and creditors
have eight weeks to object to the Liquidator's release.
When a Supplier becomes
insolvent and is liquidated, a clearly defined order of payments must be
legally followed, which is set out within the Insolvency Act 1986. Insolvency
creditor payments are prioritised as follows:
- Liquidator Costs and Expenses.
- Secured Creditors (Fixed Charge),
such as banks or other lenders holding asset titles.
- Preferential Creditors, including
employees’ wage arrears and holiday pay.
- Prescribed Part Creditors to ensure
unsecured creditors have an increased chance of recovering some of their
debt.
- Secured Creditors, including assets
not subject to a fixed charge.
- Unsecured Creditors such as
Suppliers, Contractors, Trade Creditors or HM Revenue and Customs.
The implications for an
organisation when a Supplier goes into liquidation can be many and varied; the
following aspects must be considered:
- Security of confidential and
sensitive customer data and information.
- Continuity of Supply.
- Warranty claims for products and
services already purchased.
- Recovery of products already paid
for.
- Recovery of funds paid in advance
for products and services still to be supplied.
- Loss in value of products being
stored pending sale.
A supplier's liquidation is
a significant cause for concern. Organisations must be quick to react to
resolve any supply and warranty issues caused as a result of a Supplier no
longer trading, the primary actions of which are to have a risk management process
in place that highlights areas of supply concern before a Supplier ceases
trading and business disaster recovery planning to deal with, and limit the
impacts of supply shortages and warranty liabilities.
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