Company Liquidation - What are the Options?

When a business owner believes that their company is failing or that it is not financially viable to continue with the company, they may choose to liquidate it. This means that they release available finances from assets and cease their trading under the company name. There are very strict processes and legal considerations to follow in this field to ensure that the liquidation is valid and that future business arrangements are legal.

The following guide provides information regarding company liquidation and the ways in which a business may continue following liquidation.

What is company liquidation?

Company liquidation usually occurs when a business needs to stop trading and the assets of the company are liquidated, which means they are transferred into cash. When liquidation occurs, the company's vulnerabilities and responsibilities end, and so the renting of premises and employment contracts cease.

Business owners may continue in their line of business, but the company that is liquidated will have ended. It is imperative that business owners of liquidated companies understand that they are not to continue in business in a company that has a similar name as the liquidated one. This rule is outlined in Section 216 of the Insolvency Act 1986, and breaches of this legislation can be treated as a criminal offence.

There are three types of liquidation variations in the UK:

• Creditors Voluntary Liquidation
• Compulsory Liquidation
• Members Voluntary Liquidation

Creditors Voluntary Liquidation (CVL)

Creditors Voluntary Liquidation is a process which is initiated through the directors in a company who inform the shareholders that the company is no longer viable, that it is considered insolvent and that it is necessary to cease trading. In this instance, the shareholders are then tasked with the job of asking a licensed practitioner in insolvency to arrange and hold a meeting with creditors as soon as they can (a period of no shorter than 14 days notice is needed, but it is normally around 21 days). During this meeting, the creditors will vote to decide upon a liquidator. This method of company liquidation is a swift process and so is a typical process to close a business.

Compulsory Liquidation

A compulsory liquidation is the option used following a hostile undertaking and is initiated in contradiction to the desires of the company. This makes this form of liquidation an unwelcome one and often involves the need for litigation and court involvement. The ‘official receiver' who is a civil servant is appointed to help progress the process, which is often lengthy, costly and more formal than alternative liquidation options. When compulsory liquidation needs to go ahead, the company is required to be insolvent and in a position that makes it impossible for them to repay their debts. These details are outlined in the Insolvency Act 1986. For debts exceeding a value of £750, creditors are entitled to legally deliver a statutory demand to the company. When the demand is served, the company must pay the debt within 21 days, and if payment is not made, the creditor is entitled to proceed to issue a petition for the compulsory liquidation of the company.

This means that the creditor is effectively in charge of the liquidation rather than the directors of a company. Upon the serving of the petition, the bank accounts of the company are frozen, and the process is begun to dispose of the property belonging to the company, through the approval of the court. The court hearing that takes place will result in a decision being made to either cancel, postpone or make the winding-up order. If the decision is made to wind up the company, the official receiver then arranges a meeting including all of the creditors and a decision will be made as to whether they should appoint a new liquidator or to allow the official receiver to fulfil the duties in the position of the liquidator. The procedure will then progress in a similar way to that of a voluntary liquidation.

Members' Voluntary Liquidation (MVL)

Members' Voluntary Liquidation is an option that is only available to solvent companies. In these instances, the directors of a firm are required to make a statutory declaration of solvency which demonstrates that they have fully investigated and assessed the company's dealings and affairs and in doing so, they have confirmed that the company will be financially able to pay their debts off completely within 12 months. The declaration must be supported by a written statement of the company's assets as well as their liabilities. In no more than 5 weeks following the declaration, a meeting will be held between the shareholders with the objective of cementing resolutions for the winding up of the company, as well as to decide upon a liquidator.

The liquidator is then required to provide a ‘consent to act' to the chairman of the meeting which will result in the official appointment to the role. All company creditors and the Registrar of Companies must be given notification of the liquidator's appointment and at this point, the powers of the directors will cease. A final meeting will then be called which provides the liquidator with the opportunity to present the accounts on the liquidation to the shareholders of the company, following the payment of the creditors. Within three months, the company will be dissolved by the Registrar of Companies and the liquidator will be released from their role at the final meeting or by the court.

The Role of the Liquidator

The role of the liquidator is to collect the assets of a company and share them out according to the statutory order. It is likely that the company's creditors in a Members' Voluntary Liquidation will be fully paid, as the company remains solvent when the liquidation begins. That said, in instances of a compulsory liquidation or a CVL, the creditors are less likely to receive payment in full due to the insolvent position of the firm.

As well as selling the company's assets, the liquidator may also choose to close the company's bank account and appoint agents who will act on the behalf of the company. Such agents will serve to assist in litigation matters on behalf of the company, facilitate the winding up and manage related company business. In instances of a compulsory liquidation, the sanction of the courts is required by the liquidator in order to carry out any of the duties.

The liquidator might also choose to investigate the behaviour and actions that were taken by the directors in the lead up to the liquidation as well as evaluate previous transactions of the company. In situations involving compulsory liquidations, these measures are imperative, and directors of a company may be required to undergo an examination in public of their failings in court. Because the directors' powers cease in the liquidation, the liquidator can assume the role of an agent for the company, though they will not adopt any personal liability for it.