What is Liquidation?
Liquidation is also known as ‘winding up’ a company and is the most common form of insolvency procedure. A company ceases to exist after liquidation. There are two forms of liquidation; ‘voluntary’ and ‘compulsory’, voluntary liquidation simply means that the parties concerned are aware of their financial constraints and are bowing to the inevitable. They choose to go down this route rather than have someone force a compulsory liquidation which will be more expensive. Generally liquidation can be used for either a solvent or an insolvent company.
Members’ Voluntary Liquidation (MVL)
This form of liquidation is only available to solvent companies.
Procedure for Members’ Voluntary Liquidation
The directors of a company will have to make a statutory declaration of solvency to show that they have made a full inquiry into the company’s affairs and have been able to conclude that the company will be in a position to pay its debts in full within 12 months. A statement of the company’s assets and liabilities must be accompanied with this declaration. Within 5 weeks of the declaration, a meeting between the shareholders must be called to pass resolutions for the winding up of the company and for the appointment of a liquidator. The liquidator must then provide a ‘consent to act’ to the chairman of the meeting, who will certify his appointment. Notice of the liquidator’s appointment must be given to all of the company’s creditors and to the Registrar of Companies. The directors’ powers at this point will cease. One final meeting will then be called to allow the liquidator to present his accounts on the liquidation to the shareholders of the company, after the creditors have been paid. The liquidator will be released at the meeting or by the court and within three months the company will be dissolved by the Registrar of Companies.
Creditors’ Voluntary Liquidation (CVL)
A creditors’ Voluntary Liquidation will be initiated by the directors of the company and will then be taken on by the creditors of the company. This form of liquidation will usually arise as a result of outside creditor pressure or from professional advice to the directors of the company, to the effect that the company is insolvent.
Procedure for Creditors’ Voluntary Liquidation
The procedure for a CVL is very similar to the MVL; however it begins by the directors calling a meeting for the shareholders to allow them to pass a resolution to the effect that the company can no longer continue to run its business and it should be wound up. Within 14 days of this meeting, a further meeting must be called for the creditors of the company to allow the directors to present a ‘statement of affairs’ consisting of the company’s assets and liabilities, as well as providing the creditors with the opportunity to question the conduct of the directors preceding liquidation. The creditors will also choose a liquidator at this meeting. The procedure will then continue as it would in an MVL.
For more information on:
- Compulsory Liquidation
- Procedure for Compulsory Liquidation
- Powers and Duties of the Liquidator