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.

Compulsory Liquidation

This will be the result of a hostile process, which is initiated against the wishes of the company; often leading to litigation and the involvement of the courts. A civil servant, the ‘official receiver’, will be appointed as this process is lengthier, more expensive and formal compared to voluntary liquidation. The company must be insolvent for compulsory liquidation to take place and the company must be unable to pay its debts under ss.122-123 of the Insolvency Act 1986. If a creditor is owed more than £750 he can serve a statutory demand on the company, this sum must be paid within 21 days, if it is not, the creditor can go on to pursue a petition for the winding up of the company.

Procedure for Compulsory Liquidation

Compulsory liquidation is begun by petition, as opposed to by the directors of the company, who would do so in a voluntary liquidation. The company’s bank account is then frozen and any disposal of the company’s property at this point must be approved by the court. At the following court hearing, the court has the discretion to dismiss, adjourn or make the winding-up order. If the order is made, the official receiver will call a meeting of the creditors who will decide whether or not to appoint a new liquidator or allow the official receiver to continue in his capacity as a liquidator. The procedure will then continue, similar to that of voluntary liquidation.

Powers and Duties of the Liquidator

The liquidator must gather the assets of the company and distribute them in accordance with the statutory order; the creditors of the company in an MVL will more than likely be paid in full as the company is solvent at the time of liquidation. However if a CVL or compulsory liquidation takes place, due to the insolvent state of the company, the creditors are unlikely to be in full.

In addition to selling the company’s assets, the liquidator may use the company bank account, appoint agents, litigate on the company’s behalf, carry on the company business and do all the things necessary to facilitate winding up the company. If a compulsory liquidation takes place, the liquidator requires the sanction of the courts to carry out these duties.

The liquidator may also investigate the actions of the directors prior to liquidation, and analyse past transactions. In a compulsory liquidation, this is a necessity and the directors may be called to the court for a public examination of their failures. As the powers of the directors have ceased, the liquidator will act as an agent of the company, but will not be personally liable for any contracts made.