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Company Liquidation: A Guide for Directors
Liquidation, also known as ‘winding up’ a company, is the process through which a company is closed, its assets sold to pay off any debts, and the remaining proceeds are divided between the shareholders.
Types of Liquidation
There are three kinds of liquidation: Members’ Voluntary Liquidation, Creditors’ Voluntary Liquidation and Compulsory Liquidation. The route by which the company is liquidated will depend on whether it is solvent or insolvent and on who instigates the liquidation.
If the company is solvent, a Members’ Voluntary Liquidation is the appropriate method for liquidating the company. If it is insolvent (i.e. the company can’t pay its creditors as and when payments become due or its debts outweigh its assets on the balance sheet), then it will be liquidated using either a Creditors’ Voluntary Liquidation or a Compulsory Liquidation. Broadly a Creditors’ Voluntary Liquidation is one instigated by the company’s directors, whereas a Compulsory Liquidation is one instigated by a company’s creditors.
A Compulsory Liquidation is used for insolvent companies and is usually instigated by one of the company’s creditors. In a Compulsory Liquidation, the company is wound up through the courts and an official receiver is appointed as the liquidator of the company.
What are the Grounds for Winding Up?
A creditor has the right to issue a winding-up petition to the courts if the company owes it an amount of more than £750. It must have previously served a Statutory Demand on the company, and no agreement or payment been made in response to the demand. The creditor will have to pay the court fees and a deposit (which is repaid by the company if it has sufficient funds), so it is not usually a decision that is taken lightly by creditors.
The Winding up Order
After the winding up petition has been issued, there will be a court hearing for the courts to hear the evidence and to decide whether to make a winding up order. If the order is made, the court will appoint an official receiver to realise the company’s assets, distribute the proceeds to creditors and wind the company up.
This is the least palatable of the three kinds of liquidation: not only is the company forced into liquidation, but it is a very public process that can be damaging to the reputation of the company and its directors. If you are being threatened with a Compulsory Liquidation, you should seek professional advice immediately to discuss your options.
Read more about Compulsory Liquidation
Voluntary Liquidation (Voluntary Insolvent Liquidation)
A Creditors’ Voluntary Liquidation will be used where the company is insolvent and the liquidation process is instigated by the directors. As the company is insolvent, when it is liquidated the proceeds from the assets will not be enough to pay off its arrears in full and there will not be any leftover proceeds to be shared between the shareholders.
How does a company go into CVL?
In a Creditors’ Voluntary Liquidation the directors will appoint a licensed insolvency practitioner to convene meetings of the shareholders and the creditors. The shareholders need to pass a winding up resolution by at least 75%, which also appoints the insolvency practitioner as the liquidator. The creditors then can vote to ratify the appointed liquidator, or to appoint an alternative liquidator. The liquidator(s) will then realise the company’s assets and distribute them to the creditors in their order of priority before dissolving the company.
Members’ Voluntary Liquidation (Solvent Liquidation)
The Members’ Voluntary Liquidation is the appropriate form of liquidation to use if your company is solvent and you want to close it. A company is solvent when it does not have problems paying its debts when they become due and the value of its assets is greater than the value of its debts. In a Members’ Voluntary Liquidation, the appointed liquidator liquidates the company’s assets and distributes the proceeds to the shareholders.
What is the Members Voluntary Liquidation Process?
The directors will need to sign a sworn Declaration of Solvency, which states that they have reviewed the company’s balance sheet and believe that it is able to pay its debts when they become due, and will continue to be able to do so for the next twelve months. Although the Members’ Voluntary Liquidation is instigated by the directors, the shareholders of the company need to pass a winding up resolution with 75% of the votes.
After the liquidator realises and distributes the company’s assets to its creditors and shareholders, the company is closed.
If it becomes clear that the company is insolvent at any point during the liquidation process, the Members’ Voluntary Liquidation will be transformed into a Creditor’s Voluntary Liquidation and the requirements of the CVL will need to be adhered to.
Which Liquidation Should You Choose?
If you want to liquidate your company and the company is solvent, you will need to use a Members’ Voluntary Liquidation. If company is insolvent and liquidation is unavoidable, a Creditors’ Voluntary Liquidation is the preferable route as directors have more control over the process and it does not involve the courts. Read more about the advantages of a Creditors’ Voluntary Liquidation over a Compulsory Liquidation here.
Whichever route you are considering, call us today on 0208 444 2000 to discuss available options or contact us using this form.
More Articles About Liquidation
- What are Phoenix Companies?
- Guide to Compulsory Liquidation for Creditors, Shareholders & Directors
- What are the Fees of an Insolvency Practitioner?
- Section 216 and the Prohibitions on The Reuse of a Company Name After Liquidation
- Why Should I Choose A Creditors’ Voluntary Liquidation Over Compulsory Liquidation?