Members' Voluntary Liquidation, Creditors' Voluntary Liquidation and Compulsory Liquidation.
Company Liquidation (or ‘winding up’) is the most frequently used type of Corporate Insolvency Procedure. Liquidation is the formal winding up of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority to its creditors. A liquidation procedure is used if there is no part of an insolvent business that can be salvaged or is worth saving.
With few exceptions, liquidation is the end of the road for a company and following liquidation it will be removed from the Register of Companies. Company Liquidation may occur following an Administration.
What are the different types of Company Liquidation?
There are two categories of liquidation – Insolvent and Solvent Liquidations
Insolvent Liquidations
There are two types of insolvent liquidation:
Creditors’ Voluntary Liquidations
An insolvent voluntary company liquidation is known as a Creditors’ Voluntary Liquidation (CVL) because it is resolved by the company’s shareholders. It is the most common insolvency process, can only be carried out by a Licensed Insolvency Practitioner and is primarily under the control of the creditors.
Compulsory Liquidations
A Compulsory Liquidation occurs when the decision to wind up a company is made by order of the Court. The process is frequently used by a creditor(s) who is owed money and is not being paid. The Company does not have to be insolvent but usually is, and more often than not there is no part of the business that can be salvaged or is worth saving. Initially, the Official Receiver is appointed as the Liquidator, although they may be replaced by a Licensed Insolvency Practitioner. Take a look at this article for more on the differences between a CVL and a Compulsory Liquidation.
Solvent Liquidations
Members' Voluntary Liquidations
My company is solvent. How do I close it down Tax effectively?
A solvent voluntary liquidation is known as a Members’ Voluntary Liquidation (MVL) because its conduct is primarily under the control of its members (the shareholders and /or registered directors). This procedure is usually used to close a company down that has reached the end of its useful life, providing a potentially tax efficient route for the members to exit the companys
How do I decide if liquidating my company is right for me?
- Contact our Liquidation experts.
- We will discuss your Company’s position in detail with you and suggest a plan of action.
- These discussions will help you decide whether Liquidation is the best option, or whether other options are still worth considering. These might include a Company Administration or a Company Voluntary Arrangement (CVA), for example, where it is considered possible to save a business.
- If a Company Liquidation is decided upon, you would then need to appoint an Insolvency Practitioner – we hope from Antony Batty & Company – as your Company’s Liquidator, formally instructing us to wind up your Company.
- We will appoint one of our case managers, who will guide you through the process, answering all your questions and helping you with any concerns you might have.
- The progress of your case will be monitored carefully by one of our eight Insolvency Practitioners
- Once we are appointed as your Liquidator, the winding up process commences and we will assume responsibility for dealing with your creditors and employees, as we aim to close your company down in as orderly fashion as possible.
Do I need to close my company?
Whether you are considering a solvent or insolvent liquidation, if you are not sure how to proceed, our Licensed Insolvency Practitioners can take you through the options available, and help you make the best decision for how to proceed.
We act in all three types of Liquidation. Take a look at some of our testimonials and case studies.
A Guide to the Company Liquidation Process
As a business owner, facing the prospect of liquidating your company can be a daunting and stressful experience. Whether your enterprise is grappling with financial difficulties, or you’ve simply decided it’s time to wind things down, navigating the complexities of the liquidation process can seem overwhelming.
However, with the right guidance and understanding of the key steps involved, company liquidation doesn’t have to be an ordeal. In this short guide, we’ll cover the whole process, delving into the different types of liquidation, the roles and responsibilities of directors and the order of creditor payments
At its core, company liquidation is the formal process of closing down a limited company, selling off its assets, and dissolving the business from the official register. This can occur for a variety of reasons, including:
Reasons for Liquidation
- Financial Distress: A company may enter liquidation due to cash flow problems, mounting debts, or an inability to pay its creditors. In these cases, liquidation is often seen as the last resort to avoid further financial deterioration.
- Market Decline: If a company’s sector or industry experiences a significant downturn, leading to declining profits and stagnating sales, liquidation may become a necessary step.
- Loss of Major Customers: When a company’s core customers go through their own insolvency processes or switch to competitors, it can severely impact the business’s revenue and viability, necessitating liquidation.
- Unexpected Expenses: Sudden, large bills or unforeseen costs can strain a company’s cash flow, making it impossible to continue trading and leading to the decision to liquidate.
- Retirement or Change in Direction: In some cases, company directors may choose to liquidate a solvent business due to retirement, a change in career path, or a desire to start a new venture.
Regardless of the specific reasons, the liquidation process aims to close down the company in an orderly manner, maximizing the recovery of assets for the benefit of creditors.
When a company enters the liquidation process, there are several critical steps that must be followed, each with its own set of responsibilities for the directors and the appointed insolvency practitioner.
Creditors’ Meeting
The first step in the liquidation process is the convening of a creditors’ meeting, typically held around a month after the company ceases trading. This meeting serves to:
- Confirm the appointment of the insolvency practitioner as the liquidator
- Present a statement of the company’s affairs, detailing its financial position
- Inform all creditors about the upcoming liquidation process
Directors’ Responsibilities
During the voluntary liquidation of a company, the directors have several key responsibilities:
- Providing all relevant information about the business to the liquidator
- Attending any interviews or meetings requested by the liquidator
- Handing over all company assets to the liquidator
- Granting the liquidator access to the company’s books, records, and other crucial documents
The Liquidation Process
Once the liquidator is appointed, they will take control of the company’s affairs and begin the process of winding it down. This typically involves:
- Thorough Investigation: Gathering and collating all information about the company, including assets, liabilities, and creditors.
- Creditor Identification: Compiling a comprehensive list of all creditors, including their names, addresses, and the amounts owed.
- Creditor Notification: Formally informing all creditors of the company’s impending liquidation.
- Asset Valuation: Assessing the value of the company’s assets, which will then be sold to generate funds for creditors.
- Staff Management: Handling the redundancy of employees and assisting with any claims they may have.
- Director Conduct Investigation: Examining the actions and decisions of the company’s directors leading up to the liquidation.
When it comes to liquidating a company, there are three main types of liquidation processes, each with its own unique characteristics and requirements.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation (CVL) is the most common form of liquidation, and it occurs when a company is insolvent and can no longer pay its debts. In this scenario, the directors take the initiative to appoint an insolvency practitioner to oversee the liquidation process.
The key steps in a CVL include:
- Directors recognizing the company’s insolvency and seeking advice from an insolvency practitioner
- Shareholders holding a general meeting to pass a resolution to wind up the company
- Creditors being informed of the impending liquidation and given the opportunity to object or request a physical meeting
- The appointed liquidator taking control of the company’s affairs, selling assets, and distributing funds to creditors
Members’ Voluntary Liquidation (MVL)
In contrast, a Members’ Voluntary Liquidation (MVL) is the process used when a company is still solvent, but the directors and shareholders wish to close it down. This could be due to retirement, a change in business direction, or simply because the company has achieved its objectives.
The key requirements for an MVL are:
- The directors must make a formal declaration of solvency, stating that the company can pay all its debts within 12 months
- Shareholders must hold a general meeting and pass a resolution to begin the liquidation process
- An insolvency practitioner is appointed as the liquidator to oversee the orderly winding down of the company
The final type of liquidation is Compulsory Liquidation, which occurs when a creditor has unsuccessfully tried to recover a debt owed by the company. In this case, the creditor can apply to the court for a winding-up petition, which, if approved, will result in the company being placed into compulsory liquidation.
The key steps in a compulsory liquidation are:
- The creditor issues a Statutory Payment Demand, giving the company 21 days to pay the outstanding debt
- If the debt remains unpaid, the creditor can apply to the court for a winding-up petition. If the court approves the petition, a winding-up order is issued, and an insolvency practitioner is appointed as the liquidator.
In most cases, a company that has entered the liquidation process will not be able to continue trading. The primary objective of liquidation is to close down the business and cease all operations, rather than to keep the company operating.
Directors should cease trading as soon as the decision to liquidate the company has been made. Continuing to trade while insolvent can lead to accusations of “wrongful trading,” which can result in the directors being held personally liable for some or all of the company’s debts.
The duration of the liquidation process can vary significantly, depending on the type of liquidation and the complexity of the company’s affairs. Generally speaking:
- Members’ Voluntary Liquidation (MVL): If the company is solvent and the necessary evidence is provided, first returns to directors can be made within as little as 28 days, although it is more usual to take longer. Complete closure normally takes between 6 and 12 months.
- Creditors’ Voluntary Liquidation (CVL): The process to enter into a CVL typically takes around 3 weeks. The liquidation itself can take from 6-12 months, with more complex cases taking much longer.
- Compulsory Liquidation: This can be a lengthier process, as it involves the court system and may face opposition from the company’s directors. The timeline can range from several months to up to 2 years – more 9in complex cases.
It’s important to note that the speed of the liquidation process can also be affected by factors such as the cooperation of the directors, the availability and valuation of the company’s assets, and any legal challenges or disputes that may arise.
Understandably, many business owners are concerned about the financial implications of the liquidation process. While there is no fixed, default cost for liquidation, it’s important to understand that the fees are typically covered by the company’s assets, rather than being an additional burden on the directors.
The main costs associated with company liquidation include:
- Liquidator’s Fees: The insolvency practitioner appointed as the liquidator will charge a fee for their services, which is subject to approval from the company’s creditors.
- Administrative Expenses: These can include the costs of meetings, asset realisation, fund distribution, and the production of reports and accounts.
In many cases, the funds generated from the sale of the company’s assets can be used to cover these costs, ensuring that directors are not personally liable for the liquidation expenses.
When a company enters liquidation, there is a specific order in which creditors must be paid from the funds generated by the sale of assets. This order is as follows:
- Liquidator Costs and Expenses: The first priority is to cover the fees and expenses incurred by the insolvency practitioner in their role as the liquidator.
- Secured Creditors (Fixed Charge): Creditors who hold a fixed charge over specific company assets, such as a mortgage or equipment loan, are paid next.
- Preferential Creditors: These include employees seeking unpaid wages and holiday pay, which are claimed from the Redundancy Payments Service.
- Prescribed Part Creditors: A portion of the company’s net property is set aside to ensure that unsecured creditors have a better chance of recovering some of the debt owed to them.
- Secured Creditors (Floating Charge): Creditors with a floating charge over the company’s assets, such as stock or work-in-progress, are paid next.
- Unsecured Creditors: Any remaining funds are then distributed amongst the company’s unsecured creditors, which can include suppliers, customers, contractors, and HMRC.
It’s important to note that this order of payments is legally mandated and must be strictly followed by the liquidator.
