Companies are regarded in law as separate legal personalities. The common form of company used today by most business people is known as a Private Limited Company which is a company whose shares are owned generally by one or several individuals and the shares are not available for purchase or sale on a public share trading exchange such as the London Stock Exchange.
When creditors are owed money by a limited company which does not pay its debts the company’s liability to its creditors is ‘limited’ to the amount of the company’s assets. This means that if a company’s debts are more than the value of the company’s assets the company’s creditors will not be paid in full when the company is wound up.
Company Liquidation is the term used to describe the process of winding up the affairs of a company. The winding up process in all liquidations involves collecting in the company’s assets, converting the assets to cash by selling them and distributing the proceeds of the sale firstly to pay the company’s debts and then paying any surplus to the company’s shareholders.
Until 1986 winding up companies was not a regulated activity. Over the years prior to 1986 there were a number of financial scandals associated with companies being wound up. The Government of the day introduced the Insolvency Act 1986 and since this time the winding up of companies can only be undertaken by licensed insolvency practitioners. Licensed insolvency practitioner are subject to regular monitoring of their work and are required to continue ongoing professional skills training.
There are set rules and procedures associated with companies winding up designed to prevent abuse and to ensure that creditors and all stakeholders involved in the winding up of companies are treated fairly.
When a company is unable to pay its debts and the directors conclude that there is no reasonable prospect of the company recovering from its difficulties they may conclude that the company should be placed into insolvency liquidation. This process is known as a Creditors Voluntary Liquidation.
In circumstances where a company is unable to pay its debts and the directors fail to act quickly to make arrangements of one sort or another with the creditors owed money by the company a creditor or creditors may petition the Court for the company to be placed into Compulsory Liquidation.
In some cases companies are established with a view to undertaking a task or project for a limited period of time with the intention than when the task or project is concluded the company will no longer be required. In other circumstances a company which has been trading for several or many years may come to the end of its useful life because the shareholders and directors wish to retire and enjoy the proceeds of their work. In these circumstances the company can be placed into solvent liquidation.