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 – 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 it 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 suppliers'
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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