What Are The Three Types of Liquidation?
Fast Liquidation Fact
Liquidation is the formal process of closing down a company, selling its assets, and distributing the proceeds to creditors and shareholders. It’s the final stage in the life of a business that can either no longer continue to trade, usually due to insolvency or, in the case of a solvent company, the shareholders wish to close it down.
There are three types of liquidation: Creditors Voluntary Liquidation, Compulsory Liquidation, and Members Voluntary Liquidation.
Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation is the most common type of liquidation for insolvent companies that can’t pay their debts when due. It is initiated by the directors but must be approved by the company’s shareholders and, ultimately the creditors. This process is often chosen when the directors recognise that the business cannot continue and want to take a proactive and cooperative approach with creditors.
Once a licensed insolvency practitioner is appointed as the liquidator, they take control of the company’s affairs, realise the assets, and distribute the proceeds to creditors in a strict order of priority if there are funds available after costs of liquidation. The directors have a duty to act in the best interest of creditors, and the liquidator must investigate the conduct of directors prior to liquidation to report on it to the Insolvency Service.
Creditors Voluntary Liquidation is often seen as a responsible way to deal with insolvency because it demonstrates director cooperation and being proactive in dealing with the problem of company debts when unable to service them.
Compulsory Liquidation
A Compulsory Liquidation is a court-driven process usually initiated by a creditor who is owed at least £750 and has unsuccessfully tried to recover the debt. The creditor petitions the court to wind up the company, and if the court agrees, a winding-up order is granted.
Once the company is placed into Compulsory Liquidation, the Official Receiver (who works for the Insolvency Service) becomes the initial liquidator. They may later appoint a licensed insolvency practitioner if required. The liquidator’s job is to identify and sell company assets, pay creditors if there are funds after costs of liquidation, and investigate the cause of the company’s failure and director conduct.
Compulsory liquidation is generally considered the most severe form of liquidation. It can damage the directors’ reputations and lead to disqualification proceedings if misconduct is found.
Members Voluntary Liquidation
Members Voluntary Liquidation is a solvent liquidation process, used when a company has no debts or can repay all its debts in full, within 12 months. It’s often used as a tax-efficient way for shareholders to extract cash or wind down a company that has fulfilled its purpose as a preference to voluntary strike off.
The directors must make a statutory declaration of solvency, confirming the company can meet all its liabilities. After that, shareholders pass a resolution to liquidate the company, and a licensed insolvency practitioner is appointed as the liquidator.
Members Voluntary Liquidation is common among business owners retiring, restructuring, or closing dormant companies. Unlike Creditors Voluntary Liquidation and Compulsory Liquidation, there’s no control over the appointment of the liquidator by creditors.
