The Ultimate Guide to Liquidation in Ireland

As a company director, you wear many hats. When it comes to knowing when to wind the company down, you’re often expected to know what to do.

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

Less commonly than we think, 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 involves 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 debt choose to close for other reasons like restructuring, owner retirement, or shifting business priorities and needs.

What types of liquidation are there?

There are two main types of liquidation in Ireland:

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 dissolution. A company might voluntarily shut down for a merger, retirement, reorganisation, or for 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.

Compulsory liquidation

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

Why does liquidation happen?

Liquation 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.
• A poorly performing economy: A recession or economic downturn means customers are unable to 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 potentially 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 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 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 the court and/or the Companies Registration Office. 

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. In an insolvent liquidation, the Company’s creditors are offered the opportunity to ratify the shareholder nominee for appointment.
• Compulsory liquidation: In this case, the court picks the 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 are first to be paid, using funds from the sale of the assets tied to their loans. They often appoint a Receiver to deal with the realisation of the asset over which they have security.

Unsecured creditors

Unsecured creditors don’t have a claim on specific assets and are paid only out of the realisation of unsecured assets owned by the Company. In solvent liquidations, all classes of creditor are paid in full, as the company has enough funds to cover all debts.

During insolvent liquidations, unsecured creditors most always only receive a portion of what they’re owed—or nothing at all—if there isn’t enough value to be realised from the unsecured assets owned by the Company.

Note: If selling secured assets doesn’t cover the full amount owed to a secured creditor, they become an unsecured creditor for the residual amount of their debt. They’ll rank alongside the  other unsecured creditors, and will be unlikely to recover their entire investment.

What happens to employees of a liquidated company?

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

In an insolvent liquidation, the amount employees receive from the insolvent Company depends on how much money the company has from the realisation of its unsecured assets. employees may only receive a portion or nothing at all from the Company and may need to claim entitlements from the department of welfare (subject to claim caps submitted to the department of welfare).

In Ireland, employees can often claim part of their unpaid wages through the Insolvency Payments Scheme—a government fund created to help protect workers in situations like this. It often does not cover the entirety of entitlements due though.

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 typically lose their whole investment. They’re the last to be paid after all debts have been settled with secured and unsecured creditors. 

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

Legal and financial considerations

Here’s everything you need to know 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 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 recognise the Irish Proceedings.
• Data Protection 2018 and the GDPR: These laws govern privacy rules and ensure the correct handling of  personal data during the 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 liquidation proceedings. These costs usually include the liquidator’s fees, legal fees, and other expenses related to selling the company’s assets.

A liquidator is paid out of Company assets and realisations ahead of all creditors but normally behind the costs of a Petitioning Creditor in the Case of a Court Liquidation.

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 law as laid out 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.
• 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.

Is a Members Voluntary Liquidation tax efficient?

Yes, they can be. Here are some common ways they are used for tax efficiency:

Stamp duty exemption on assets distributed in specie

What is distribution In Specie?

When a company is wound up through an MVL, it doesn’t always sell its assets and distribute the cash. Sometimes, the company transfers actual physical or financial assets (like property, shares, or other investments) directly to shareholders. 

This direct transfer of assets—rather than cash—is known as distribution in specie.

What Are Shareholders Typically Entitled To?

Shareholders in an MVL are typically entitled to the company’s net assets after liabilities (debts, taxes, etc.) have been settled. Each shareholder receives assets proportionate to their shareholding. 

For instance, if a shareholder owns 25% of the company, they’re entitled to 25% of the net assets during liquidation.

Assets commonly distributed in specie might include:

• Property or real estate
• Shares or securities
• Equipment or machinery
• Intellectual property
• Debtors or loan accounts

Why Is Stamp Duty Considered in an MVL?

Normally, transferring assets (like property or shares) between entities or individuals attracts stamp duty, a tax paid on documents that transfer ownership. In Ireland, stamp duty applies particularly when transferring:

• Shares
• Land or property
• Business assets

The good news for shareholders in an MVL is that there’s generally a stamp duty exemption for these asset distributions, provided:

• The assets are distributed strictly according to the shareholders’ entitlements (i.e., their proportionate shareholding).
• No additional payment (called “consideration”) is involved. In other words, shareholders aren’t paying extra money or taking on debt for these assets.

This exemption exists because the transfer isn’t considered a regular sale—it’s simply shareholders receiving assets they’re already entitled to as owners.

When Might Stamp Duty Still Apply?

There are circumstances where stamp duty might still apply, even within an MVL:

• If the shareholder takes on existing debt or assumes liabilities associated with the asset (for example, a property that has a mortgage).
• If there’s any additional payment or adjustment (cash or debt assumption) beyond the shareholder’s original entitlement.

If these conditions arise, stamp duty would then apply based on the asset’s market value or the amount of debt assumed.

Entrepreneur Relief of 10% Tax Where Qualifying

Entrepreneur Relief allows shareholders to benefit from a reduced Capital Gains Tax (CGT) rate of 10% on qualifying gains, up to a lifetime limit of €1 million. 

To qualify, the individual must have held at least 5% of the company’s ordinary shares for three years and have been a director or employee. 

They also spent at least 50% of their time in a managerial or technical capacity for three out of the five years immediately before disposal. 

It’s important to note that this relief doesn’t apply to share disposals where the individual remains connected with the company after the disposal.

Capital Gains Tax at 33% as opposed to Income Tax in Excess of 50%

In an MVL, distributions to shareholders are typically treated as capital distributions, subject to CGT at 33%. 

This is often more tax-efficient than income tax rates, which can exceed 50% when combining income tax, Universal Social Charge (USC), and Pay Related Social Insurance (PRSI). 

Therefore, receiving distributions under CGT treatment can result in significant shareholder tax savings.

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 needs to be managed.
• 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 liquidation looks likely, here’s what you can do as a financial director:

• Get professional advice: Don’t wait—talk to a liquidator or insolvency expert to figure out what’s next.
• 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 you and your organisation protected in the long run.

Key takeaway 

Liquidation happens when a company closes 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 the company’s assets and pays off creditors. In a solvent liquidation, employees are paid what they’re owed, and shareholders typically get at least some of their investment back.

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 allows companies to take action and potentially avoid insolvency although this is not always possible.

Specific laws—including the Companies Act 2014 and Data Protection 2018 along with the GDPr—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.