What Happens to the Share Stock When a Company is Going Into Liquidation

1. What Happens to the Share Stock When a Company is Going Into Liquidation? When a publicly listed company ceases operations and goes into liquidation, the company's shareholders may be entitled to a portion of the assets, depending on the type of shares they hold. When a limited company is classified as insolvent, i.e. their debts are greater than its assets and it is not in a position to meet its financial obligations, the directors of the company are either forced into liquidation by its creditors – compulsory liquidation – or they make the decision to enter a Company Voluntary Liquidation (CVL) process.

2. However, before a CVL liquidation process can commence, the directors of the company must get agreement from at least 75% of the shareholders that company liquidation is the best option. It’s usually at this point shareholders get a true picture of the company’s position, although they may have had their suspicions much earlier on, particularly if it is a large company and their dividends have not been as high. Where do Shareholders Stand When There is a Liquidation? Although the primary aim in a liquidation is to pay creditors, shareholders are lowest in terms of their priority.

3. Proceeds are paid to creditors in the following order: ● Secured creditors ● Preferential creditors ● employees ● Unsecured Creditors ● Shareholders When it comes to solvent company liquidation, share stockholders are in a much stronger position and are more likely to receive a return on their investment. If a solvent company wants to wind up, i.e. close down, the directors enter a Members Voluntary Liquidation process. As with all company liquidation processes, it must be handled by an appointed licensed insolvency practitioner and agreement must have been sought from the shareholders of the company. At the start of the liquidation process, the directors sign a Declaration of Solvency, i.e. they swear an oath that they can pay all creditors and their tax liabilities within 12 months of the completion of the liquidation process. This is effectively a guarantee to all creditors and shareholders that they will be paid back, and receive a return, respectively. At the end of the liquidation process, the IP will transfer the relevant funds to what is called a designated client account – this is a dedicated account that has been opened in the name of the company prior to liquidation commencing by the directors specifically for the purpose of paying out funds. The IP will collect and check all shareholders bank details and pay out the funds to shareholders. The shareholders will receive confirmation of the amount paid out and the figure they will have to declare on their tax return. In most cases, the IP will hold some funds back as part of a contingency fund but generally, this isn’t used and will be passed back to shareholders.