What is Liquidation?

As per United Kingdom law, liquidation is the process by which a company or a part of a company is brought to an end i.e. the company is no longer allowed to do trading of any kind. When a company is undergoing liquidation, all of its assets and properties get redistributed amongst its creditors, because it is their money which the directors of the company are not able to repay. Another common used term for liquidation is winding-up or dissolution, although dissolution is normally the last stage of the liquidation process.

As a director of the company, you can choose to liquidate your company or a part of your company if you think that the business is no longer making a sizeable profit or the demand of your product/production is no longer viable. However, once you decide to liquidate or wind up your company, it has to stop conducting any sort of trading and employing people and its name will be struck off the Registers of the Companies House, which implies that it no longer exists as an entity. In order to liquidate your limited company, you need to appoint an Insolvency Practitioner (IP), also known as Proposed Liquidator who after understanding of company affairs and its assets v/s liabilities, will liquidate the company by selling off its assets and property and redistribute the generated revenue to the creditors in order of the priority.

Company Liquidation

Primary reason behind liquidation is shortage of cash i.e. there is sizeable amount of debt against your creditors and you are not able to repay it to them. In this scenario, liquidation could either be Voluntary Liquidation which means you shut down your business on your own and sell off its assets and properties to repay the debts to the creditors or Forced Liquidation which could be done only by a winding up order by the court.

How Many Types of Liquidation are there?

There are three types of liquidation, such as:

  1. Compulsory Liquidation: As the name implies, this type of liquidation is forced one, generally initiated by a creditor or creditors who is looking into winding up a company via a court order. In real world, this is normally the last resort opted by the tired and disgruntled creditors after numerous failed attempts to get their money back and it becomes highly imperative of you to act on the situation else it will end up in forceful liquidation of your company.
  2. Voluntary Liquidation: There are two primary types of Voluntary Liquidation:

A. Creditors Voluntary Liquidation:

A Creditors Voluntary Liquidation, also known as CVL, is a process which allows an insolvent company to shut down voluntarily and the decision to do so is made by a board resolution. It happens when its shareholders and directors decide to close the company, in other words, decide to place the business into liquidation because it no longer can pay its debts and bills. Creditors Voluntary Liquidation is the most common form of liquidation in United Kingdom under which all trading will cease and the assets of the company is sold in order to repay the creditors.

Creditors’ Voluntary Liquidation

Creditors Voluntary Liquidation is different from the forced or compulsory liquidation, which is forced upon an insolvent company to wind up its operations via a court order and it is much better for the directors than compulsory liquidation and if you feel that your company is no longer turning a profit and its trading is no longer a viable option then Creditors Voluntary Liquidation may be the best option to conclude its affairs. This procedure can give directors and shareholders the opportunity to sell the assets of the company and re-open the business within another company, subject to certain conditions and a Creditors Voluntary Liquidation is always a director-led process and can only be initiated by the board of directors.

Process of Creditors Voluntary Liquidation:

A Creditors Voluntary Liquidation is a procedure whereby a company which finds itself in an insolvent position decides to opt for liquidation of its assets and thus from thereon cease to exist legally as an entity and though it’s a director led process and can only be initiated by the board of directors, you need to appoint an Insolvency Practitioner, who after understanding the company affairs and its assets and liabilities, will set out the terms and conditions of liquidation process and it usually begins with a meeting of directors whereby the arrangement to place the company into Creditors Voluntary Liquidation begins. Primary role of an Insolvency Practitioner, also known as Liquidator, is to help directors and shareholders of the company with correct and appropriate advice and to consider the possibility of rescuing the company, if possible. However, in cases where rescuing the company is not at all possible, formal insolvency procedures are used, such as Company Voluntary Arrangement or Creditors Voluntary Liquidation, whichever is more feasible. In most of the cases, it is the Creditors Voluntary Liquidation which is opted more. In Company Voluntary Liquidation, it’s the shareholders who appoints and pay for the Insolvency Practitioner, also known as proposed liquidator.

The decision to enter the company into a Company Voluntary Liquidation is made by the directors; however it is up to the shareholders to pass the relevant resolutions. Directors, once decide on CVL, have to call for a meeting in which at least minimum 2 directors need to be present to discuss the further route and once the directors confirm that CVL is the most appropriate route, an Insolvency Practitioner is appointed to take on from there with the process of Company Voluntary Liquidation.

Insolvency Practitioner, also known as liquidator, will hold a meeting with the shareholders of the company, who hold the power to pass any resolutions related to CVL. When the company decides to enter into a CVL, all of its trading ceases immediately so it is imperative of the liquidator to have a meeting with the shareholders for their consent on the same. If the shareholders agree to the liquidation, they then agree and confirm the directors’ choice of the liquidator. Ideally meeting with the shareholders is to be held immediately as soon as the directors decide on the Company Voluntary Liquidation; however, a notice period of minimum 14 days needs to be given to the shareholders before actual meeting is held. A minimum of 75% of the shareholders is required.

Once the shareholders agree and pass the resolutions, next step for the Insolvency Practitioner is to hold a meeting with the creditors of the company and to do so, the proposed liquidator needs to understand the details of company’s creditors, including banks, trade creditors, finance companies, employees etc. Once he has all the relevant details, he will then write to the creditors informing them the details such as place, date, time and agenda of the meeting. Ideally the creditors meeting should be held immediately after the shareholders’ meeting, however, a minimum of 7 days notice period must be given to them. In general practice, creditors get notice period of 3-4 weeks as well.

A director must attend both the meetings, i.e. meeting with the shareholders and the creditors, wherein he acts as a chairman and the proposed liquidator, i.e. the Insolvency Practitioner will assist in conducting the meeting in an organized manner. Once the agenda of the meeting is discussed followed by the presentation of the report and statement of affairs, vote of the creditors is to be casted and the appointment of the liquidator is by the vote of a simple majority of creditors, above 50% by value of claims. In case a creditor is unable to attend the meeting, he can still cast his vote in writing before the meeting commences. In case the creditors choice of the liquidator is different from that of the shareholders, it is the creditors choice which prevails and a report of the creditors meeting should be circulated to all known creditors within 28 days of the meeting.

Once the liquidator appointment is ratified by the creditors, he starts with his duties related to Creditors Voluntary Liquidation, which involves:

  1. Understanding of company assets and liabilities.
  2. Dealing with employee claims, if any.
  3. Liaising with the creditors regarding the progress of the liquidation.
  4. Understand the company affairs and conduct of the director(s).
  5. Maintain a report outlining the findings.
  6. Arrangement of distribution of available funds, if any, to the creditors.

Company in picture, enters into liquidation on a deemed date which is normally within 14 days from the date the creditors receive the report and during the liquidation process, the insolvency practitioner will continue to liaise with the creditors to resolve issues, if any and to take necessary and required steps to sell and distribute company’s assets.

Liquidation of a company is considered to be complete when all of its assets are realized and all creditors’ claim have been adjudicated, in case of sufficient funds and net realizations after expenses of the liquidations have been distributed to the directors.

Advantages of Creditors Voluntary Liquidation:-

  1. In case your business is not able to sustain because of cash crunch, CVL is an effective way to shut it down.
  2. As a director of a company, you have more control over selecting the Insolvency Practitioner; however the final decision lies with the shareholders and the creditors.
  3. CVL takes the pressure off the debts and thus removes the pressure from the banks and the creditors.
  4. It minimizes the risk of incorrect/wrongful trading.
  5. It gives you an opportunity to start afresh.
  6. As a creditor, you don’t have to chase after your money because you know it is taken care of and you will get major chunk of your money back, if not all
  7. As a creditor, you want to ensure that the directors of the company conduct themselves well. In case of CVL, you are assured that the directors’ conduct will be formally investigated.
  8. As a creditor, you can reclaim your VAT.

Disadvantages of Company Voluntary Liquidation:-

  1. As soon as your company enters into liquidation, it has to stop all of its trading.
  2. Your conduct, as a director, will be investigated and if you have acted inappropriately with the money, you will be held liable for the debt.
  3. In case you are a small sized limited company, cost of CVL could feel heavy on your shoulders.
  4. In case you have made any personal guarantees on loans or overdrafts, they will be called in.
  5. As a creditor, you might lose some of your money, considering all bad debts are written off during a Company Voluntary Liquidation.

B. Member’s Voluntary Liquidation (MVL):

Unlike Creditors Voluntary Liquidation, Member’s Voluntary Liquidation is available to companies who are still solvent i.e. value of total assets is more than its liabilities. However, you need to take expert advice of Insolvency Practitioner to understand if your company is still solvent or not for you to opt for Member’s Voluntary Liquidation. Once the solvency of a company is established, its members or shareholders meet to pass a resolution to wind up the company affairs by appointing an Insolvency Practitioner who will then look into the sale of assets and property of the company and the generated revenue is then redistributed amongst its creditors in full and the shareholder.

Members’ Voluntary Liquidation

As a part of a voluntary liquidation, if the directors of the company decide that they no longer want to continue with the business for whatsoever reason, they can take a call to wind up the entire process and sell off the assets to pay their debts in total. However, Members Voluntary Liquidation is available for those companies who are still solvent i.e. whose assets are more in value than its liabilities. A company is considered legally solvent when it is able to meet its financial obligations and the value of its assets i.e. equipments, inventory, contracts, invoices, bank accounts, property, etc is more in value than its debts and liabilities.

An essential requirement for a members’ voluntary liquidation is that the majority of its directors must make a statutory declaration and have to make a sworn Declaration of Solvency, which states that they have made a detailed study of company’s affairs and as per their understanding and knowledge, company has more assets than its debts and liabilities and will be able to pay its debts in total in a time period of not exceeding 12 months, from the commencement of liquidation. Since it is the directors who take a call on the solvency of the company, the onus for repayment of debt within a specified period lies on them and in case they fail to do, they will be held liable for the default.

While the directors make Declaration of Solvency, they must include the following details in the same, such as:

  1. The name and address of the company.
  2. The names and addresses of the company’s directors.
  3. Time period needed by the company to repay its debts in total, which should not be more than 12 months from the declaration date.
  4. Statement of the company’s assets and liabilities.

Once the solvency of a company is established, its members or shareholders meet to pass a resolution to wind up the company affairs by appointing an Insolvency Practitioner who will then look into the sale of assets and property of the company and the generated revenue is then redistributed amongst its creditors in full and the shareholders.

After the declaration of solvency, a resolution for winding up must be passed and accepted by its members and once passed, it has to be published in the Gazette within 14 days and filed with the Registrar of the Companies House within 14 days of its adoption. In a Members Voluntary Liquidation, it is up to the directors to appoint an Insolvency Practitioner or the Proposed Liquidator and notice of his appointment should be sent to the creditors within 28 days of the appointment.

The appointed liquidator will call for a meeting with all the creditors of the company by sending them a notice for the same and the intention for the same is to understand their concerns regarding repayment of their money. As a liquidator, one has a wide range of powers to enable realization of the company’s assets, agreement of creditors’ claims and redistribution to the creditors and members and he can also operate bank accounts in the name of the company and to invest funds.

A voluntary liquidation commences at the time of passing of the resolution and from that time, the company exists only for the purpose of winding up and no trading should be done for business or profit purpose.

What is the Role of the Liquidator?

The liquidator, also known as Insolvency Practitioner, is an official who is legally appointed by the directors or shareholder (in case of a voluntary liquidation) and by the court (in case of a compulsory liquidation) to take care of liquidation process. However, in case of a voluntary liquidation, such as Creditors’ Voluntary Liquidation, the liquidator acts in the interest of the creditors not the directors. An appointed liquidator will:

  1. Settle legal disputes, if any.
  2. Sell off the assets of the company and use the generated revenue to the creditors.
  3. Keep a check on the relevant paperwork.
  4. Settle the liquidation costs and final VAT bill.
  5. Investigate the directors and understand what went wrong where.
  6. Make the payment to the creditors and involve them in the decision making whenever required.
  7. Ensure that the company’s name is removed from the Registers of the Companies House.

Once a liquidator is appointed, directors of the company cannot act on behalf of the company and they have no control of the company or any of its assets. Also, as a liquidator, you must get all kind of information relevant to the company and its affairs for better understanding of what went wrong where and if directors are to be blamed for any of the liability. In case, directors are found liable for the same, they could be banned from being a director for 2 to 15 years.

Can You Re-Use the Name of Your Liquidated Company?

In case of a Compulsory or Creditors Voluntary Liquidation, you cannot re-use the name of your liquidated company for a time span for at least 5 years and it is applicable both for the trading as well as registered name of the company. However, there is certain exception to this rule, such as:

  1. You have a court order which permits you to manage, form or promote your business with the name of your liquidated company.
  2. You are involved with another company which is using the same name as the liquidated company for at least a year.
  3. The business is sold by a licensed insolvency practitioner giving the legally required notice.

Liquidation of a company is considered to be complete when all of its assets are realized and all creditors’ claim have been adjudicated, in case of sufficient funds and net realizations after expenses of the liquidations have been distributed to the directors.

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