What Does Liquidation Mean In Business?
What does liquidation mean in business? Written by John A Waller, Director. Reviewed May 11th, 2022.
Liquidation in business in the UK refers to closing a limited company, whether solvent or insolvent, while distributing the realised assets to its creditors and, if solvent, company shareholders.
What is a Solvent Liquidation?
A solvent liquidation of a limited company is when a limited company wishes to cease trading, realise its assets, and repay all its creditors and debts in full. Should any monies be left, the Liquidator will distribute them to shareholders of the company.
The process used for solvent liquidations remains referred to a Members Voluntary Liquidation (MVL)
What Is an Insolvent Liquidation?
An insolvent liquidation of a limited company is when a limited company cannot pay all its creditors and debts once it ceases to trade.
Two types of liquidation exist for an insolvent company.
- A liquidation entered into voluntary. Referred to as a Creditor’s Voluntary Liquidation (CVL). So-called to enable the best return possible for creditors.
- An involuntary liquidation. Referred to as a Compulsory Liquidation.
What is Creditors Voluntary Liquidation?
Creditors voluntary liquidation (CVL) is perhaps the most used liquidation.
Directors consider a CVL often due to the limited company’s dry cash flow, therefore unable to pay its debts when required. Additionally, directors are worried the business is not viable, as company creditors and HMRC threaten legal action. Hence, an insolvent limited company.
The company’s directors then ask a liquidator, a licensed insolvency practitioner, to organise a meeting of the company’s creditors within 14 days. At the meeting, the IP presents a statement of the company’s affairs to summarise the current position and explain the procedure. Creditors then vote on the Liquidator’s appointment to liquidate the assets to repay them.
Once appointed, the director’s duties cease, and any control. However, remain obliged to cooperate with the Liquidator, providing prompt responses to their company queries and tenure as directors. As part of the Liquidator’s duties, they will examine the former conduct of the directors. Should any issues be raised, such as fraud, misfeasance, or any other mal management? Directors risk disqualification.
The primary duty remains to realise the company’s assets, then distribute the funds realised to company creditors.
What is a Compulsory Liquidation?
Unlike a Creditor’s Voluntary Liquidation, a compulsory liquidation is not voluntary by the directors. Creditors commence it, including HMRC, who have run out of patience waiting for payment.
To commence the process requires the debt must be undisputed, owing over £770.00. Furthermore, the creditor must have notified the debtor of their action. The process requires the creditor to issue a statutory demand first, usually. Should the debtor fail to either dispute or pay the debt within 21 days of its delivery, the petitioning creditor may take the next step and issue a winding-up petition to the debtor.
Due to the current Coronavirus COVID-19 pandemic, petitions of this type may not commence for amounts owing under £10,000 until March 2022. However, if the debt is not attributable to the pandemic, then this does not apply.
What is a Members Voluntary Liquidation?
A Members Voluntary Liquidation is considered
an ideal mechanism to reduce a burden of tax on a solvent company closure
Members Voluntary Liquidation (MVL) brings a solvent company to a close formally. A solvent liquidation is carried out by a licensed insolvency practitioner who acts as Liquidator. Their primary role differs from a CVL. They realise the company’s assets, along with settling the company’s debt in full. Once that is completed, they then distribute the remaining funds to company shareholders. Unlike a CVL, an MVL requires all creditors to pay both those outstanding and within a contract. The Liquidator must gain HMRC clearance before removing the limited company from the registrar at the company’s house for those companies registered in England and Wales legally considered dissolved.
To commence a Members Voluntary Liquidation, 75% of the company shareholders must however agree on the winding-up resolution.
What Does Liquidation Mean In Business? Can I liquidate my own company?
A licensed insolvency practitioner must manage the process.
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