It’s perhaps not something you want to think about, but it’s worth being clued up on the basics of liquidation, the terms used and how the processes work in case you ever find yourself in this tricky situation.
- Liquidation legally ends or ‘winds up’ a limited company - the company will be removed (‘struck off’) from the Companies House Register and will cease to exist.
- A company can be liquidated whether it is solvent or insolvent.
- Liquidation proceedings can be voluntary or compulsory.
- A liquidated company cannot trade or employ people.
- The proceedings can be complex and vary slightly between England and Wales, Scotland and Northern Ireland.
Businesses considering or facing liquidation should seek professional advice from an insolvency practitioner or solicitor.
There are three ways a company can be liquidated
1. Members’ Voluntary Liquidation (MVL)
This is a solvent form of liquidation where the company directors decide to stop trading and close the company by striking it off the Companies Register.
This process is usually used where shareholders decide to cease trading and convert the assets of the company to cash for distributions as dividends to them or sometimes for obtaining tax relief on capital distributions.
2. Creditors’ Voluntary Liquidation (CVL)
Directors can wind up their company through a creditors’ voluntary liquidation where they have concluded that the company can no longer continue to trade because of its inability to meet its debts and that they must now resort to taking steps to place the company into liquidation. In this case, proceedings are carried out by a qualified practitioner. It does not involve the Court but does, however, it does require creditor approval.
3. Compulsory Liquidation
A Compulsory Liquidation is where the company is wound up by an order of the Court. Creditors can apply to the court to wind-up an insolvent company. An official receiver or other qualified legal practitioner is appointed to oversee proceedings.
Liquidation and “winding up”
Effectively, liquidation and winding up refer to the same process. A company’s assets (property, equipment, vehicles, materials, petty cash and other things) are listed and then either sold or redistributed to pay the company’s debts.
Liquidation and administration
Liquidation and administration, on the other hand, are two different things. Administration refers to the appointment of an administrator, when a company is in financial crisis and at the point of insolvency. The administrator has powers to make decisions on behalf of the company.