Company Liquidation: Voluntary vs Compulsory
Liquidation refers to the procedure in which a limited company is brought to a close by an appointed Insolvency Practitioner (Liquidator). The company’s assets are then sold (liquidated) and any realisation of revenue is redistributed in order of priority. The company is struck-off the registrar of companies and this is known as dissolution, which is the final stage of the liquidation process.
What are the Different Types?
There are two voluntary liquidation procedures and one compulsory procedure. The voluntary procedures, which are initiated by the shareholders and directors are explained in more detail below and the compulsory procedure, which is usually initiated by creditors like HMRC via a court order, is also covered.
- A Creditors’ Voluntary Liquidation (CVL) is used by insolvent companies and is initiated by a shareholders’ resolution. It involves the dissolution of the insolvent company and the redistribution of the company’s assets to the creditors. This procedure enables directors to write off unsecured limited company debts that are not personally guaranteed. Directors may see voluntary liquidation as a welcome and safe exit from a stressful situation; whilst addressing all of the creditors, appropriately. If the limited company has debts that it cannot afford to pay and you would like to move on without the stress of the company’s debts hanging over your head, this type of business liquidation may be an appropriate option. Although it should be seen as a last resort, liquidating a company via this route can be considered a rational decision and it may not necessarily mean the end of business.
- A Member’s Voluntary Liquidation, or ‘MVL’, is the appropriate way to liquidate a company that is solvent and can be used as part of an exit strategy. An MVL may be considered if you have a solvent company that you want to close as part of your business plan and reduce taxation. Your company may have outlived its purpose, or you may wish to extract the value of cash and assets from the company in a tax efficient manner. For an MVL, the directors must sign a declaration stating that there are no creditors.
Compulsory liquidation is usually initiated by a creditor that is looking to force a company into closure via a court order. The process is usually instigated with a winding up petition which is heard at court. This procedure is often used as a last resort by disgruntled creditors after failed negotiations. The procedure is usually handled by the Official Receiver, or an appointed Insolvency Practitioner. Therefore, this is not a voluntary process for directors.
If you do not act immediately the situation can escalate quickly. Do not ignore any threat in the form of a winding up petition, as the intention is to forcefully liquidate your company.
The Process in 5 Steps
The details of the process when voluntarily liquidating a limited company depend largely on the type of liquidation that is chosen. However, the five basic steps below are included within all of the procedures:
- An Insolvency Practitioner is appointed as Liquidator.
- The company’s assets are then assessed and realised (liquidated).
- If there are any creditors they are then paid in order of priority.
- Surplus cash is distributed to the shareholders.
- The company is finally dissolved and struck-off the registrar of companies (Companies House).
How Long Does it take to Liquidate a Company?
There is no set time-frame to liquidate a limited company and with several variables dependent on each case, it is challenging to give an accurate time-frame without sufficient information. However, once engaged, the Insolvency Practitioners will act immediately and the company can be placed into liquidation within a two-to-three week period if sufficient information is provided, promptly. The liquidator will remain in office until all of their responsibilities have been addressed.
The Role of a Liquidator
An appointed Insolvency Practitioner (Liquidator) is required for liquidation. These professionals have the responsibility to act as an impartial, third-party to oversee the process from beginning to end. The role of a liquidator encompasses various responsibilities which include, but are not limited to:
- Distributing the realised assets and surplus funds to the appropriate parties;
- Determine any outstanding claims against the company and satisfy those claims in order of priority that is set by law;
- Investigating the affairs of the company and its directors;
- Checking for misconduct, wrongful or fraudulent trading; or illegal transactions that may have taken place.
What are the Potential Consequences?
The most important thing for directors to realise when liquidating a company is that their responsibilities undergo a marked shift if the company becomes insolvent. Once insolvent, the directors must prove they have acted in the best interests of the creditors. To avoid the threat of personal liability, it is important that directors act responsibly and take professional advice, immediately.
Liquidation and ‘winding-up’ are often used in the same context. Both of these terms refer to liquidating a limited company; either because the company has cash-flow problems, or because there are cash and assets, such as property, that the directors and shareholders would like to extract.
Sometimes people mistakenly refer to the phrase “company bankruptcy”. Bankruptcy is only relevant to an individual, partner, or sole trader and not a limited company.
When you are considering liquidating a company due to financial problems, take the time to compare all of the available options. There are other courses of action that may be available to companies in financial difficulty, so consider exploring these before you decide to close the company via liquidation. You may find that options such as a Company Voluntary Arrangement (CVA) or Administration will provide a viable way for the company to carry on trading.
For free confidential advice on liquidating a company and help with your current situation, please contact us on 08000 746 757.