The Beginners Guide to Liquidation in Ireland

As a company director, you have to wear many hats. When it comes to knowing when to wind the company down, you must know what to do.

Liquidation in Ireland usually takes place when a solvent company decides to close due to tax, restructuring, or other financial reasons.

Now and again, liquidation occurs because the company is insolvent and can no longer pay its debts.

By learning about the process in detail, you’ll be well-equipped to manage either scenario in your organisation.

This guide will cover the liquidation process, legal and financial considerations, prevention strategies, and more.

Introduction to liquidation 

Here are the basics of liquidation, including what it is and why it happens.

What does liquidation mean?

Liquidation is closing a business and distributing its assets to claimants. This can occur if the company is financially healthy (solvent) or not (insolvent).

A business may decide to liquidate, or be forced to do so if it can no longer manage its finances and falls into debt. 

But most of the time, liquidation isn’t due to financial failure. Many solvent businesses without excess debt choose to close for other reasons like restructuring, owner retirement, or shifting business priorities.

What types of liquidation are there?

There are two main types of liquidation in Ireland:

1. Voluntary liquidation 

Voluntary liquidation happens when a company’s owners or shareholders decide to close the business themselves. There are 2 subtypes within this category:

• Members Voluntary Liquidation (MVL): This is the official process for closing a financially healthy company. Since the company is solvent and has more assets than debts, it can repay everything it owes before its closure. A company might voluntarily shut down for a merger, retirement, reorganisation, or tax purposes. 
• Creditors Voluntary Liquidation (CVL): This happens when a company can’t pay its debts. The owners of the insolvent company decide to close the business and sell its assets to pay off creditors.

2. Compulsory liquidation

Compulsory liquidation happens when the High Court orders a company to close down and sell its assets to pay off debts. This usually occurs because a creditor brings the company to court for unpaid bills. A liquidator is then appointed to sell the company’s assets, and the money made is used to pay the creditors.

Why does liquidation happen?

Liquidation can happen for several reasons, but some of the most common are: 

• Merger or acquisition: The business is bought or merged with another company and liquidates its assets as part of the deal (even if it’s financially healthy).
• Retirement: The owner decides it’s time to step away and enjoy retirement.
• Restructuring for a fresh start: The owners decide to close down the business to reset or start over with a new venture.
• Partnership dissolution: The partners decide to go their separate ways and wind down the business.
• Failure to pay debts: The business can’t afford to repay its loans or overdue bills.
• Market shifts: New trends have made the business’s products or services obsolete, and their sales are dropping.
• Low cash flow: The business doesn’t bring in enough money to cover necessities like rent, employee salaries, or office supplies.
• Bad economy: A recession or economic downturn means customers can’t afford the company’s products or services.

What happens when a company goes into liquidation?

If a company goes into liquidation, the impact spreads company-wide. Here’s how it affects all the major players in an organisation: 

Solvent liquidation

• Directors: They’ll either step down or stay on to help manage the liquidation and make sure assets are fairly distributed.
• Creditors: They get paid what they’re owed in full since the company has enough money to cover its debts.
• Employees: They receive their final wages, benefits, and anything else they’re owed.
• Shareholders: After all other bills are paid, shareholders divide the remaining money or assets based on their ownership in the company.

Insolvent liquidation: 

• Directors: They’ll lose their jobs and might face legal consequences if their poor decisions lead to the company’s financial woes.
• Creditors: They’ll get some of the money they’re owed, but usually not the full amount. It all depends on what’s left after the company’s assets are sold.
• Employees: They’ll likely lose their jobs. If they’re owed unpaid wages, they’ll become creditors and may get a portion of what they’re owed.
• Shareholders: They’ll probably lose their entire investment since they get paid last—after the creditors.

The liquidation process

Next, let’s break down the liquidation process step by step.

How does liquidation work?

Anytime a business goes into liquidation, whether voluntary or compulsory, a liquidator is brought in to handle everything.

In solvent liquidations, the liquidator’s primary goal is to sell the company’s assets, settle its bills and wages (because the company can afford to do so), and then distribute any remaining funds to shareholders.

However, the liquidator’s job is a bit more complicated during an insolvent liquidation where the business can’t pay its debts. They must use the money from selling the company’s assets to pay off large debts to creditors. Their goal is to get as much of the debt paid back as possible. 

During both types of liquidation, the liquidator handles all the legal steps during the liquidation to ensure the company closes in accordance with the law—including notifying and paying creditors as fairly as possible and submitting the right paperwork to statutory agencies. 

How is a liquidator appointed?

How a liquidator is chosen depends on the situation:

• Voluntary liquidation: The company’s directors or shareholders select the liquidator based on who they think has the best experience and knowledge to handle the process.
• Compulsory liquidation: In this case, the court appoints a liquidator. Once chosen, the liquidator takes charge of the process, selling the company’s assets and ensuring everything is done by the book.

What happens to creditors during the liquidation process?

As we now know, creditors are paid from the money the company makes from selling its assets. But there are 2 types of creditors in a business: secured and unsecured. 

Here’s what happens to creditors in solvent and insolvent liquidations: 

Secured creditors

These are creditors with a claim on specific assets in the company—like property or equipment. In both solvent and insolvent liquidations, they sit outside of the liquidation when an agent is appointed to crystalise their security, using funds from the sale of the assets tied to their loans as their primary repayment mechanism.

This is a complex area though and should secured assets exist then advice sought be sought.

Unsecured creditors

Unsecured creditors don’t have a claim on specific assets and are paid in accordance with the order of payments in a liquidation and sit behind preferential creditors such as employee entitlements and the Revenue Commissioners. In solvent liquidations, unsecured creditors are, like all other creditors, paid in full, as the company has enough funds to cover all debts.

However, during insolvent liquidations, unsecured creditors may only receive a portion of what they’re owed—or nothing at all—if there isn’t enough money left after paying creditors which rank ahead of them.

Note: If selling the assets doesn’t cover the full amount owed to a secured creditor, they become an unsecured creditor for the residual of the debt owed. 

What happens to employees of a liquidated company?

Employees usually lose their jobs when their company goes into liquidation. During a solvent liquidation, there should be enough funds to cover any outstanding wages, holiday pay, and other benefits owed to them.

But during an insolvent liquidation, the amount employees receive depends on how much money the company has after realising the asset base to which the Company appears entitled. If there isn’t enough left, employees may only receive a portion or nothing at all.

In Ireland, employees can often claim part of any unpaid wages through the Insolvency Payments Scheme—a government fund created to help protect workers in situations like this.

What happens to shareholders of a liquidated company?

In a solvent liquidation, shareholders are paid after all debts, including wages and bills, have been settled. But how much of their investment they get back depends on the company’s finances and what’s left after paying off everything.

During an insolvent liquidation, shareholders are last to be paid and will only receive a capital dividend on their investment after all other classes of creditor have been discharged.

In some cases, there may be enough money left for shareholders to receive a small return, but unfortunately, this is often rare. 

Legal and financial considerations

Here’s everything you need to know at a base level about the legal and financial considerations involved in liquidation.

Can a company be forced into liquidation?

Yes, under Section 570 of the Companies Act 2014, a creditor can force a company into liquidation by filing a winding-up petition with the High Court. 

Previously, the creditor had to be owed more than €10,000 (or €20,000 for two or more creditors) to file this petition. But the Covid-19 Companies Act 2020 increased the minimum amount for a demand to €50,000 for a debt due to a single creditor and to two or more creditors. This means that a creditor (or creditors) must now be owed more than €50,000 to be able to file a winding-up petition with the High Court.

What laws and regulations govern liquidation in Ireland?

The primary laws and regulations governing liquidation in Ireland are: 

• Companies Act 2014: This law outlines the procedures for both voluntary and compulsory liquidation in Ireland. It covers the reasons for liquidation, how liquidators are appointed, how assets are shared, and what rights and duties creditors have.
• European Insolvency Regulation (EU 2015/848): This EU rule helps companies facing financial trouble in more than one EU country. For example, if a company goes into liquidation in Ireland, other countries operating in the EU will follow suit.
• Data Protection 2018: This law follows privacy rules and ensures personal data is handled correctly during liquidation.

Who pays for the liquidation?

Since a limited company is its own legal entity, it’s generally responsible for covering the costs of its own liquidation proceedings. These costs usually include the liquidator’s fees, legal fees, and other expenses related to selling the company’s assets.

What rights do liquidated companies have in Ireland?

When a company enters liquidation in Ireland, it still has some rights. For one, the owners and shareholders have the right to be treated fairly throughout the liquidation process. And if it’s a voluntary liquidation, the company can appoint a liquidator of their choosing.

A liquidated company also has the right to access its records and can challenge creditors if needed. The liquidator must follow the rules in the Companies Act 2014, so everyone’s rights—creditors, shareholders, employees—are respected.

How does liquidation affect the credit rating of directors and shareholders?

Typically, liquidation doesn’t affect the personal credit scores of directors and shareholders because the company’s debts are separate from their personal finances. 

But there are some cases where directors or shareholders can be held personally liable for company debts:

• Personal guarantees: If directors or shareholders personally guaranteed the company’s debts, they might be on the hook for those debts, which could hurt their credit scores.
• Fraudulent/Reckless trading: Directors can be personally liable for the company’s debts if they knowingly continue to trade while the company is insolvent and can’t pay its debts. 

What is the impact of liquidation on ongoing contracts?

When a company goes into liquidation, ongoing contracts can be affected in several ways, including:

• Supplier agreements: If the company owes money to suppliers, the liquidator may try to settle the debts or negotiate for the suppliers to continue providing goods or services if trading during the liquidation has occurred.
• Leases: The liquidator may keep or break leases based on whether they are helpful or not. But if a lease is broken, the company might face penalties or owe unpaid rent.
• Employee contracts: The liquidator may end employee contracts, but employees can still claim unpaid wages or benefits as uncredited suppliers.

Early warning signs and prevention in creditors’ voluntary liquidation

A company never enters creditors’ voluntary liquidation out of the blue. In fact, there are usually warning signs, which, if spotted early enough, could save the company.

What are the warning signs?

Some of the main signs of impending liquidation include: 

• Rising debt: A growing pile of debt and constant pressure from creditors—like threats of legal action or stricter payment terms—signals a financial crisis is near.
• Cash flow issues: If a company can’t pay its bills on time—wages, suppliers, or taxes—it’s another red flag. 
• Falling profits and revenue: When sales go down or stay the same while costs increase, it can signal that solvency is a concern.
• Inadequate financial planning: Bad financial records, poor budgeting, and not tracking key numbers can cause a company to miss early warning signs of trouble.

How can a company avoid compulsory liquidation?

If insolvency is a concern, here’s what you can do as a financial director:

• Get professional advice: Don’t wait—talk to a corporate insolvency practitioner to figure out what the options are.
• Review the finances: Take a hard look at the numbers—cash flow, debts, and assets—to really understand the situation.
• Talk to creditors: Be open and honest with creditors about where things stand and try to keep the communication lines open.
• Explore other options: Before jumping into liquidation, think about the other choices available. Is restructuring or refinancing a possibility?
• Protect the business: Make sure everything is above board and in compliance with the law to keep your organisation protected in the long run.

Key takeaway 

Liquidation happens when a company shuts down for good. An insolvent company may be forced to close due to unmanageable debt, while a solvent company might choose to shut down for reasons like a merger, acquisition, or retirement—despite still being financially healthy.

In both cases, a liquidator sells/distributes the company’s assets to pay off creditors in an insolvent liquidation and to provide a capital return on shares in a solvent liquidation. In a solvent liquidation, employees are paid what they’re owed, and shareholders typically get a return on their investment.

But in an insolvent liquidation, employees may not receive what they’re owed, and shareholders often lose their entire investment. Spotting early signs of financial trouble lets companies take action to avoid insolvent liquidation and make smarter choices moving forward.

Specific laws—including the Companies Act 2014 and Data Protection 2018—govern the liquidation process in Ireland.

Key Terms / Glossary:

• Solvent Liquidation: Liquidation for companies that can pay their debts (e.g., MVL).
• Insolvent Liquidation: Liquidation for companies that cannot pay their debts (e.g., CVL, compulsory liquidation).
• Compulsory Liquidation: Court-ordered liquidation initiated by creditors or other parties.
• Preferential Creditors: Creditors who are paid first, such as employees owed wages.
• Unsecured Creditors: Creditors without collateral backing their claims.
• Debtor: The company owing money to creditors.
• Winding-Up Petition: A legal document filed to start the process of compulsory liquidation.
• Distribution of Assets: The process of selling company assets and paying creditors.
• Receiver: A person appointed to manage and realise assets, typically in insolvency.
• Director’s Responsibilities: Legal obligations of directors during the liquidation process.
• Fraudulent Trading: Conducting business with the intent to defraud creditors.
• Phoenix Company: A new company formed from the remnants of a liquidated company.