Liquidation or winding up a company is one of the most commonly used insolvency procedures in the UK. Once a company has been liquidated it will no longer exist. There are two main types of liquidation. The first is voluntary and the second is compulsory.
Voluntary liquidation is where the business owner admits that they are in financial difficulty and are accepting what is inevitable. Compulsory liquidation on the other hand can force a business into liquidation which can prove even more expensive. If the business is in such a dire financial situation, voluntary liquidation is always preferable. Liquidation can be used whether the business is solvent or insolvent.
Voluntary Liquidation (MVL)
This type of liquidation is only an option if the business is solvent and it requires the owner of the company to follow a set procedure.
Firstly the Directors of the business will have to make something called a statutory declaration of solvency. This will evidence that a full investigation has been undertaken to explore the finances of the company and it has been concluded that the business will be able to repay their debts in full within a period of 12 months.
This declaration must be supplied along with a statement of the company’s liabilities and assets. Within five weeks of this declaration being made, there must be a meeting between the shareholders to agree a resolution to wind up the company and put in place a suitable party to liquidate the business.
The appointed individual responsible for liquidating the company will then have to provide their consent to the Chair of the meeting who will at this point certify the appointment of the liquidator. Notification of liquidation must be issued to all creditors of the business and the Registrar of Companies.
At this point the Director will lose their control over the business. A final meeting will be arranged which will allow the liquidator to present accounts to shareholders once the creditors have been paid. The liquidator will then be released from their duties at the meeting or in some instances, by the Court. Within three months the Registrar of Companies will dissolve the business.
Creditor Voluntary Liquidation (CVL)
Where liquidation is voluntary, the process is started by the Directors and it will be continued by creditors. This type of liquidation usually occurs when creditors are putting pressure on the business or when the company has received expert advice and guidance that this is the best option.
When starting voluntary liquidation proceedings, it is very similar to the MVL, but it will start with the directors holding a meeting with shareholders to enable them to identify a suitable resolution. Usually this will decide that the business can no longer operate and it should be liquidated.
Following this meeting there is a period of 14 days in which a further meeting must be held for the creditors. At this meeting the directors are expected to present to the creditors a statement of affairs which incorporates the liabilities and assets of the company. In addition, creditors should have the opportunity to question the conduct of the directors following liquidation. The creditors will also appoint a liquidator during this meeting.
Wherever possible, a compulsory liquidation should be avoided. Compulsory liquidations can prove hostile and often the process is commenced against the wishes of the business owner. Frequently this method of liquidation will result in litigation and legal action through the courts. During compulsory liquidation an ‘Official Receiver’ usually a civil servant will be appointed and the whole process is considerably longer than a voluntary liquidation.
For compulsory liquidation to take place, the business must be insolvent and unable to make any repayments for outstanding debt in line with ss. 122-123 of the Insolvency Act from 1986. If a creditor is owed in excess of £750 they can issue something called a statutory demand on the business. When one of these are served, the business has a period of 21 days in which to pay. If the company fails to pay the creditor can pursue a petition to have the company liquidated.
The process for company liquidation on a non-voluntary basis starts with a petition rather than by the directors in a voluntary situation. Bank accounts for the company will be frozen and any property owned by the company from this point onwards must be approved by the court.
A court hearing will be scheduled and the court will be able to adjourn, dismiss or instruct a winding up order. If an order is granted, the official receiver will make arrangements for a meeting to be held with the creditors who will decide whether or not to appoint another liquidator or allow the official receiver to continue the process.
The liquidator has an important role to play in the process. Their task is to collate a list of assets owned by the company and then distribute these in line with a statutory order. The creditors of the business are likely to be paid in full if the company is solvent when it is liquidated. In the case of a compulsory liquidation, the creditors are unlikely to be reimbursed in full.
As well as disposing of the company’s assets, the liquidator may also make use of the company bank account, participate in litigation on behalf of the company, appoint the necessary agents and carry on the business. Their role is to facilitate the process of liquidating the business as quickly and cost effectively as possible. During a compulsory liquidation, the liquidator may need approval from the court to undertake these duties.
Liquidators may also undertake the necessary investigations to evaluate the actions of the directors prior to the company being placed in liquidation. Historical transactions may also be analysed. During a compulsory liquidation this is essential because the directors may be instructed to attend court to complete a public examination and explain the reasons for their failure. As the powers of the directors have been dissolved, the liquidator will act as an agent but they are not accountable for any outstanding contracts.
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This article was written by a member of the Expert Answers legal advice team and posted by Expert Answers admin. Expert Answers provides online legal advice on all aspects of UK Law to users in the United Kingdom.
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