These are the 3 main types of Liquidation:
• Creditors’ Voluntary Liquidation
• Compulsory Liquidation
• Members Voluntary (solvent) Liquidation
Creditors Voluntary Liquidation (‘CVL’)
The CVL process is driven by the directors of an insolvent company and is a way of formally winding-up its affairs when the business is no longer viable.
At a board meeting the directors resolve that the company should be wound up. This takes place a few weeks later when certain resolutions are passed at meetings of shareholders and creditors.
A detailed report on the history of the company, and the reasons for its failure, is presented at these meetings. Whilst the shareholders appoint a Liquidator in the first instance, creditors then get the opportunity to appoint a different Liquidator if they wish.
It is a Liquidator’s duty to:
– protect and realise the company’s assets
– assist former employees’ with their claims for wage arrears, redundancy etc
– investigate the company’s affairs
– report on the directors’ conduct
– distribute surplus funds to creditors
A company enters into Compulsory Liquidation when it has been wound up by the Court following a winding-up petition presented (typically) by a creditor, the company’s directors or its shareholders.
Initially, a company’s affairs will be managed by The Official Receiver, a government official, but in many cases an Insolvency Practitioner will be appointed to deal with the winding-up.
The Liquidator’s duties are virtually the same as in a CVL except that the Official Receiver conducts the investigation into the directors’ conduct.
One of the few differences in the two processes is that (usually) the costs of a Compulsory Liquidation are higher due to the level of mandatory government fees which are charged.
Members Voluntary (solvent) Liquidation (‘MVL’)
An MVL is undertaken by the company’s shareholders when the company has reached the end of its useful life and has a surplus of assets over liabilities. It is a very tax efficient mechanism for shareholders to extract value from their company.
The directors swear a statement, known as a declaration of solvency, to say the company will be able to pay all its debts (plus statutory interest and costs) within a period not exceeding twelve months.
It is worth noting that:
– it is a criminal offence to swear a declaration of solvency, when the company is not solvent and able to settle all of its liabilities
– there is no creditors’ meeting as the creditors will be paid in full
– the liquidator’s duties are to ensure that all creditors are paid in full and that the remaining assets are distributed amongst the shareholders
– there is no investigation or directors’ conduct report as the company is solvent
– once the company’s assets have been distributed, the Liquidator ceases to act and the company is struck off and dissolved