If a company is broke, bankrupt or in debt, liquidation is used to collect its assets, determine the outstanding claims against the company, and sort out the claims in order of the law.
A liquidator is appointed when a company is placed into liquidation. The liquidator takes control of all the company’s unsecured assets, which are sold to repay the creditors. Trading companies are usually closed, although sometimes they might continue to trade for a short time so the business can be sold.
Directors are required to complete a Statement of Affairs form which includes:
- A brief description of the company’s history
- Trading details
- Details of the cause of the company’s failure
- All company assets
- All company liabilities
- All shareholder information
- Any legal claims by or against the company
The director also needs to help the liquidator locate the business’ records and assets and to answer any questions about the company. Attempting to destroy, hide or remove property records/documents is an infringement and does not end pleasantly! The liquidator will check all of this anyway and most likely find out if any offences have been committed etc.
If it happens that there is a surplus after all the company assets have been dealt with and the debts and liquidation expenses have been paid, then it will be issued back to the shareholders.
A guarantor is someone who agrees to repay the debt of a company or person if they fail to do so. If the company goes into liquidation or the person enters a personal insolvency procedure (example; bankruptcy) the guarantor will have to repay the creditor. Company directors often guarantee their company’s debts, which means they must repay them if the company goes into liquidation.
A disposal contract is an agreement governing the sale of a business’s assets or the entirety of a business. A buyer may be interested in part of a business, leaving the seller with obligations and liabilities, or the entire business is sold including liabilities. It is usual for a buyer to do due diligence on the seller, to understand what liabilities, it will inherit. In some instances, a seller conducts due diligence on the acquiring company, for legacy reasons.