Understanding the types of liquidation
Closing a limited company is never an easy decision, but liquidation doesn’t always mean a business has failed. Some companies close because they can’t pay their debts. Others may close the company to start new ventures or because they have decided to retire.
There are three main types of liquidation in the UK, but the process isn’t the same for every company. Much depends on whether the business can pay its debts and why its owners want to close it.
In this article, we’ll explain the difference between solvent and insolvent liquidation, the three types of liquidation, how each works, and what it involves, so you can better understand the types of liquidation.
What’s the difference between solvent and insolvent liquidation?
A company’s financial position determines which type of liquidation it can use. The main distinction is whether it can afford to pay what it owes.
- Solvent liquidation: The company can pay its debts in full. Its owners may decide to close it and share out the remaining funds.
- Insolvent liquidation: The company can’t pay debts when they’re due or owes more than its assets are worth. Money raised from selling assets goes towards repaying creditors.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation is a way for an insolvent company to close voluntarily. Directors may consider it when efforts to save the business haven’t worked and continuing to trade could add to its debts.
The directors usually initiate the process, and shareholders and creditors vote to wind up the company. A licensed Insolvency Practitioner then acts as liquidator.
They take control of the company’s affairs, sell its assets and distribute the money to creditors in the order required by law. They also investigate the directors’ conduct. Once the process is complete, the company is usually dissolved.
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation lets the owners of a solvent company formally close it. It can be useful when directors retire, a business has served its purpose, or shareholders want to release money tied up in the company.
Directors must be confident the company can pay all its debts, including any interest owed. They’ll be required to sign a formal declaration of solvency, which states that the company can pay all its debts within the time period required by law.
Shareholders then vote to close the company and a licensed Insolvency Practitioner is appointed to oversee the liquidation. They’ll make sure any outstanding debts are paid before passing the remaining money or assets to shareholders.
An MVL can have tax benefits in some circumstances. It’s worth getting advice on how the rules apply to you before starting the process.
Compulsory liquidation
Compulsory liquidation usually starts when a creditor takes legal action over an unpaid debt. Rather than the company choosing to close, the creditor asks the court to wind it up by submitting a winding-up petition.
If the court grants a winding-up order, the Official Receiver initially oversees the liquidation. Later in the process, another Insolvency Practitioner may take over as liquidator.
The liquidator sells company assets and uses the proceeds to repay creditors where possible, in line with legal priorities. Directors must cooperate and provide the records needed to investigate the company’s affairs.
Get advice on liquidating your company
Bridge Newland can talk through your situation, explain the options available and help you decide what to do next. Contact the team for practical, confidential advice.
Categorised in: Liquidation News