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What does liquidation mean?

6 June 2018

What does it mean when a company is liquidated and what happens to it afterwards?

If a company is liquidated then its assets, for instance property and stock,  are "liquidated" or turned into cash for the creditors of the company.  This can be done in three ways;

  1. Creditors Voluntary Liquidation
  2. Compulsory Liquidation
  3. Members Voluntary Liquidation ( cash is returned to the members as the company is solvent )

Creditors voluntary liquidation (CVL) is the most common form of liquidation in use in the UK.  There are about 10,000 of these done each year.

Usually the company has run out of cash, it cannot pay its debts on time and the directors are concerned that the business is simply not viable as creditors are threatening legal action.

The directors then ask a liquidator, who must be a licensed insolvency practitioner (IP), to convene a meeting of the creditors of the company.  At the meeting, which is now often held virtually, the IP will present a statement of affairs of the company to outline the current position and explain the procedure.  The creditors then vote on the appointment of the liquidator to "liquidate" the assets to try and repay them ( hence it is called a "creditors" liquidation).

Once the liquidator is appointed the directors no longer have any control or duties in relation to the company but they are duty bound to cooperate with the insolvency practitioner and provide information in a timely manner.  The IP will then look into the conduct of the directors and if there has been very bad practice, misfeasance or fraud then they may recommend a disqualification.

What can the director do next?

You can liquidate a company and start the same or a new business again, but only under strict rules and conditions. This is a potential legal "minefield" and you need to take proper advice.  Most importantly you cannot use the same or similar trade or business name as the liquidated company without leave of the court or permission from the IP.  It is likely that HMRC will ask for VAT deposit from the new company if they have been a significant creditor in the previous company.

Call us or read our Experts Guide to Creditors Voluntary Liquidation (see link below) if you want more details. This FREE guide tells you all you need to know about liquidation or call us on 0800 9700539 for a free chat through your company's issues.

Why not download our voluntary liquidation guide

What happens in compulsory liquidation?

A compulsory liquidation is when the creditors of the company have lost all patience try to collect the debt. The debt must be over £750, must be undisputed, and the creditor must have notified the debtor of its intent to collect the debt. This often involves issuing a statutory demand first. If the debtor fails to pay the statutory demand in 21 days and does not dispute the debt, then the creditor may issue a winding up petition.   

If the judge grants the winding up order then the official receiver will interview the director, liquidate the assets of the business to try and repay the creditors.   This process generally takes much longer than a voluntary liquidation and is more stress and hassle for the directors involved.  What is more the official receiver has a mandatory duty to look at the behaviour of the directors

What does Members Voluntary Liquidation mean?

A members voluntary liquidation is where the shareholders/members appoint a Liquidator to close down a solvent company which has no further purpose.  The Liquidator will realise all company assets and pay any company liabilities, then a capital distribution will be paid to shareholders. 

A Members Voluntary Liquidation requires 75% of shareholders who have been given notice of the meeting of members to pass the winding up resolution.

Categories: Creditors Voluntary Liquidation CVL

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