Liquidation is the name given to the ending of the life of a company after which the business will no longer be in existence and will be struck off the Companies House register.
There are two types of liquidation or ‘winding up’. The first- Members Voluntary Liquidation (MVL) is used when the company is solvent (in other words it has enough money or assets to pay its debts), a Creditors Voluntary Liquidation (CVL) Is applicable when the company cannot pay its creditors.
In the case of a solvent company, the process is a fairly simple and straightforward one.
For a non-trading company that has no assets or reserves then it’s a simple matter to go through the process of dissolution. The business needs to have conducted no transactions for at least three months and the directors will have to sign a solvency declaration. An application for striking off can then be sent to Companies House using form DS01. All being well, 3 months after the company will be struck off the register.
It’s worth noting that at this point any further assets owned by the company at this stage will then become Bona vacantia, in essence the property of the crown, hence why it is so important to make sure the process is conducted properly.
The striking off process is the ultimate end point of both the MVL and the CVL.
With an MVL the company may be trading, have creditors, debtors and shareholders but the directors and shareholders for whatever reason may decide that the company should not continue.
In this case the aim is that the value of the company will be returned to shareholders and the company will be wound up.
The starting point for the MVL is for the directors to hold a board meeting at which it is agreed to move to liquidation. It’s a good idea at this point to make sure that an insolvency practitioner is engaged to advise on the steps to be taken.
There are a series of things that need to be considered at this point. The company will have assets that it needs to realise and creditors to pay off. The directors will also need to consider whether an indemnity will be required and also the tax implications of the process.
Once all of the pre-liquidation transactions have been completed then a board meeting will need to be convened at which the directors will review the status of the company and sign a statutory declaration of solvency.
Time then is of the essence as the declaration is valid for five weeks, during which time an EGM of the shareholders should be called and a resolution to wind up the company passed.
From this point on the process follows the standard liquidation procedure apart from the need to carry out administration tasks such as closing down the PAYE scheme and informing any interested parties.
For insolvent companies there are two ways that events can unfold. The first is that the directors realise that there is no chance of trading out of the situation and choose to appoint a liquidator voluntarily. Unsurprisingly this is called a voluntary liquidation or CVL. The second way is that creditors lose patience with the business and apply to the court for a winding up order.
For a CVL process the directors really need to take advice early on. Although it may seem like the best option there are other methods such as a prepack that may be more applicable. Getting an insolvency professional in at the start of the decision process will help directors to make the right choice.
Should the CVL be chosen as the correct course of action then the practitioner will prepare a report for creditors and circulate. In some cases a physical meeting will be needed but that is no longer a requirement. The practitioner will propose a date for the company to enter the liquidation process and barring objections that is what will happen.
The insolvency practitioner will be formally appointed as liquidator of the company and the process of realising the assets will begin. This will include collecting any debts due to the business and selling off any physical assets. The liquidator will have to tread a line between getting the best price for the assets and realising cash quickly to minimise losses and fees.
The liquidator will also be required to investigate the actions of the directors during this time. Directors are required to act within both the law and in accordance with the company memorandum and articles although in the case of a CVL it can be said that they have taken a realistic position in setting off on the route of liquidation rather than having it forced upon them.
Once the assets have been realised then the liquidator may make interim distributions to creditors, finalising their report and running the business through the standard liquidation procedures.
Until now we’ve discussed methods of liquidation that are largely in the control of the directors however there is one case there that control is lost – the compulsory liquidation.
This is where creditors have lost patience with the company and have seen no likelihood of collecting their debts. In this case they may choose to apply to the courts for a winding up order.
The company is of course able to challenge the winding up petition in the court or indeed pay the debts due but if it does not have the cash available or fails to get the petition set aside or stayed then the court will appoint a liquidator of its own.
The process proceeds in a similar manner to the CVL but with the key difference that the liquidator reports to the court and the directors will have lost any control they may have had. It is also fair to say that the report into directors’ conduct will be somewhat more detailed and may be critical.
The liquidation process can range from simple to complex but in all cases it is important to get professional advice allowing the directors to make the right choices at the right time.