What is liquidation?
Liquidation is the process of closing down a limited company by selling its assets and dissolving it so that it is no longer registered with Companies House.
Liquidation most often occurs when a company is facing financial pressures that have led to continual cash flow problems, resulting in a company’s creditors not being paid. Creditors may choose to take enforcement action against the company to wind down the business. This may occur through a Creditors’ Voluntary Liquidation (CVL) or a Compulsory Liquidation through the courts, usually when a Winding-Up Petition has been issued by the unpaid creditor of an insolvent company.
Liquidation can also be a voluntary procedure chosen by a business’s directors and shareholders to officially close the company for their benefit.
We discuss each of the liquidation options below.
Why might a company go into liquidation?
There are many reasons why a company may go into liquidation.
- A business may have lost its primary customer or supplier, leading to financial and operational difficulties.
- There may be a decline in the market or other external economic pressures on the business that leave it indebted.
- The company may have received an unexpected bill or seen its liabilities grow considerably over a short period, leading to cash flow problems.
- A business may have not received payment from its debtors.
- The directors and shareholders may have chosen company liquidation as the best route to winding down the business.
What are the different types of liquidation?
There are three main types of company liquidations. Whether the liquidation is voluntary or compulsory, the primary reason for liquidation is to realise value through selling assets, usually for the benefit of creditors, and to completely close the company at the end of the process.
The three main types of liquidation are:
Creditors’ Voluntary Liquidation (CVL)
A CVL takes place when a company becomes insolvent and can no longer pay its liabilities or continue trading. The director will need to instruct an Insolvency Practitioner (IP) through a Letter of Consent to commence the liquidation process. The IP will then take control of the company to oversee the liquidation of assets and communicate with the company creditors.
Members’ Voluntary Liquidation (MVL)
A Members Voluntary Liquidation (MVL) can be used when a company is still solvent and able to trade, but the directors want to close the company down and distribute its value among the shareholders.
Once decided upon, an MVL will progress in much the same way as a CVL, where the appointed Liquidator will wind down and liquidate the company.
Compulsory Liquidation
A Compulsory Liquidation occurs when a company’s creditor issues a Winding-Up Petition due to unpaid debts. This initiates a court hearing, where a judge can implement a Winding-Up Order placing the company into Compulsory Liquidation. The company is then appointed a Liquidator who liquidates and distributes the company’s assets by creditor priority.
What are the advantages and disadvantages of liquidation?
Advantages
- Removes pressures from all creditors.
- Prevents further legal action.
- Gives directors a clean break to move on from the company.
- Once the company is liquidated, directors will not be liable for any further fees or legal action related to the business.
- Ensures creditors receive the best possible return on the debt owed.
- Employees can submit redundancy pay claims through government schemes.
- Gives directors the opportunity to purchase assets at a fair value for another business, in certain circumstances.
Disadvantages
- Once liquidation commences any further trading may lead to a prosecution.
- Directors cannot recover any tax losses that may have been incurred during trading
- Directors personal guarantees will potentially be called upon
Can a company continue to trade while in liquidation?
The purpose of a company liquidation is to close down the business. For this reason, directors should cease trading as soon as the decision to liquidate the company has been made. This is particularly important in an insolvent situation, as directors who continue to trade when a company is insolvent can be found guilty of Wrongful Trading.
Get assistance today
Having a professional on hand to help assess your business’s situation and guide you through the appropriate insolvency process can give directors real peace of mind and support during a difficult time.
We understand the need for confidentiality in these situations, and we are available for a free, no-obligation call so you can discuss your situation without judgment and find the best course of action.
Contact our Head Office 020 3995 6380 to arrange a call with one of our local Partners today.