Types of Liquidation of a Company

In very simple terms, there are three different types of liquidation process: solvent, insolvent and compulsory.

The three main ways of liquidating a company in the UK are:

  1. Creditors’ Voluntary Liquidation (CVL): This is for insolvent companies that cannot pay their debts.
  2. Compulsory Liquidation: This is when a court orders a company to be liquidated because it cannot pay its debts.
  3. Members’ Voluntary Liquidation (MVL): This is for solvent companies that can pay their debts and want to close down.

In this article, we will explain each type, including the circumstances under which they occur, the process involved, and their effects on the company and its stakeholders.

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Three-Types-of-Liquidation

Compulsory Liquidation

Compulsory liquidation occurs when a court orders the winding up of a company.

This type of liquidation is initiated by the company’s creditors (often HMRC) when the company is unable to pay its debts.

The process of compulsory liquidation begins with a court hearing, where the creditors present evidence of the company’s inability to pay its debts to a judge. If the court finds that the company is insolvent, it will issue a winding-up order, and appoint an Official Receiver to liquidate the company.

The liquidator’s role in compulsory liquidation is to take control of the company’s assets, sell them, and distribute the proceeds to the creditors in order of priority. The liquidator will also investigate the company’s affairs and report any misconduct or illegal activities to the relevant authorities.

Compulsory liquidation has significant implications for the company and its stakeholders. The company will cease to exist, its directors will lose control of the company, and its employees will lose their jobs. The company’s assets will be sold, and the proceeds will be used to pay off the creditors. Shareholders are unlikely to receive any payment, as they are at the bottom of the list of priorities for payment.

Now, we’ll cover the two types of voluntary liquidation.

Creditors’ Voluntary Liquidation

Creditors’ voluntary liquidation is the official term of voluntary liquidation initiated by the company’s directors and shareholders due to insolvency.

By choosing a CVL, the directors can take control of the situation and initiate the liquidation process rather than waiting for the creditors or the court to force the company into compulsory liquidation. This can help to minimise the financial losses for the company’s stakeholders, including employees, creditors, and shareholders.

The CVL process begins with the directors convening a meeting of the company’s shareholders to pass a resolution to wind up the company.

The directors will then convene a meeting of the company’s creditors, at which the creditors can appoint a liquidator of their choice. If the creditors do not nominate a liquidator, the company’s shareholders may appoint one of their own.

The role of the liquidator in CVL is to take control of the company’s assets, sell them, and distribute the proceeds to the creditors in order of priority. The liquidator will also investigate the company’s affairs and report any directorial misconduct to the Insolvency Service.

Members’ Voluntary Liquidation

Members voluntary liquidation occurs when a solvent company chooses to wind up its operations and distribute its assets among its shareholders. This type of liquidation is often used by companies that have achieved their objectives or are no longer needed.

The MVL process begins with the directors passing a resolution to wind up the company and declare its solvency.

Once the declaration of solvency has been made, the directors will convene a meeting of the company’s shareholders, who will pass a resolution for the appointment of a liquidator. The role of the liquidator in MVL is to take control of the company’s assets, sell them, and distribute the proceeds to the shareholders.

MVL has significant implications for the company and its stakeholders. The company will cease to exist, and its directors will lose control of the company. However, as the company is solvent, its employees will not lose their jobs and may be entitled to claim redundancy pay from the government. The shareholders will receive their share of the proceeds from the sale of the company’s assets.

Members’ voluntary liquidation (MVL) can be a tax-efficient way for shareholders to receive the proceeds from the sale of a solvent company’s assets. This is because, in an MVL, the shareholders are treated as having received a capital distribution rather than income, which is subject to lower tax rates.

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FAQs on the Types of Liquidation

The impact on employees varies depending on the type of liquidation. In compulsory and creditors’ voluntary liquidation, employees are usually made redundant. In members’ voluntary and administrative liquidation, employee outcomes can differ based on the company’s financial status and the administrator’s plans.

Generally, creditors may prefer administrative liquidation as it aims to pay off debts by running the company efficiently. However, the suitability of a liquidation type depends on various factors including the company’s financial condition.

In compulsory liquidation, directors may face disqualification. In voluntary types, directors usually have more control over the process. Administrative liquidation places control in the hands of the administrator.