What Does Liquidation Mean?
A summary of what a liquidation means and the three different types of liquidation procedures
If a company is placed into liquidation, then its assets are sold or “liquidated” to turn those assets into cash, which are then paid to the creditors and shareholders of the Company.
There are three types of liquidation:
Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation, or “CVL”, is the most widely used insolvency process in the UK and is used to liquidate insolvent companies.
Usually the Company has run out of cash or is facing financial pressure from its lenders or creditors and the directors make the decision to place the Company into Liquidation.
The directors will need to contact a Liquidator, who must be a Licensed Insolvency Practitioner and instruct them to place the company into liquidation. This will involve calling a meeting of shareholders and a decision procedure for creditors.
The meeting of shareholders and decision procedure for creditors are usually held virtually and can take place between seven and twenty one days or so from the director signing notices. The Director, with the assistance of the Insolvency Practitioner, will prepare and present to the creditors a Statement of Affairs, which is a summary of the company’s assets and liabilities.
At the meeting of shareholders the members decide to place the company into liquidation and appoint a Liquidator. It is the creditors however who ultimately decide which Insolvency Practitioner should be appointed as Liquidator which is why it is called a Creditors Voluntary Liquidation.
The Liquidator will then proceed with liquidating the assets of the company with a view to paying a dividend to the creditors.
The directors of an insolvent company may have a number of options available to them, as follows:
Firstly, the directors may be able to claim redundancy pay from The Insolvency Service if they are considered to be employees of the company. This is a simple process which we are able to assist with and more information can be found here.
Secondly, the directors may wish to form a phoenix company, which is a new company incorporated to purchase the assets of the company in liquidation and take over the running of the business. More information in respect of phoenix companies can be found here.
This is a complicated area of law, with strict rules and procedures so taking advice will be essential, which we are happy to provide.
More information on Creditors Voluntary Liquidation generally and the processes involved can be found by clicking here.
Compulsory Liquidation is a Court driven procedure, whereby a creditor has issued a Winding Up Petition to force a company into Liquidation.
The amount owed to the creditor must be more than £750 and more often than not a Statutory Demand has been issued first. More information on Statutory Demands can be found here.
Once a petition is issued, a hearing date is set by the Court. On that date the Court will decide whether or not the company should be placed into liquidation, and an order to that effect will be made.
On the making of the Winding Up Order a Government civil servant called the Official Receiver will be appointed as the Liquidator, who will then seek to liquidate the Company’s assets and investigate the conduct of the directors.
More information on Compulsory Liquidations can be found here.
If a Statutory Demand or a Winding Up Petition has been issued it is still not too late to take action. We would be happy to provide you with advice in that regard and discuss the options with you.
Members Voluntary Liquidation
A Members Voluntary Liquidation is also called a solvent liquidation and because there are usually no creditors remaining the members are in charge and decide which Insolvency Practitioner is appointed as Liquidator of the Company.
The Liquidator will usually liquidate the assets of the business and then distribute those assets to the shareholders. This can be done by either selling the assets and distributing the funds to the shareholders, or by transferring the assets direct to the shareholders, which is often called a distribution in specie.
There are often significant tax advantages to placing a company into Members Voluntary Liquidation and further information in that regard can be found here.
Our page on Members Voluntary Liquidation will also provide further information on the rules and procedures.
If you would like any advice or assistance with Company Liquidations please contact Chris Parkman on 01305 458383 or via email at email@example.com.