What is Liquidation?
In the UK, there are three types of liquidation:
Creditors Voluntary Liquidation (CVL)
Company Voluntary Liquidation (CVL) is initiated by directors who recognize the company’s insolvency—its inability to pay debts as they fall due. An insolvency practitioner (IP) is appointed to carry out the legal steps necessary to wind up the company.
Compulsory Liquidation
Compulsory Liquidation occurs through a Court Order, typically initiated by a creditor, often HMRC, after obtaining a judgment for unpaid debts (CCJ). If the debt remains unpaid, the creditor petitions the court to wind up the company, demonstrating the company’s inability to pay debts.
Members Voluntary Liquidation (MVL)
MVL is used when a company is solvent, meaning it can pay its debts. It involves realizing company assets and distributing funds to shareholders, often as a tax-efficient means to close a successful business.
Company Voluntary Liquidation (CVL)
• The Liquidator’s Role
Once appointed, the liquidator assumes control of the company, acting as the board of directors. Their primary duties include selling company assets and distributing proceeds to creditors after deducting their fee. Additionally, the liquidator submits a report on directors’ conduct to the DTI, influencing potential actions against directors for public interest reasons.
• Can Directors or Shareholders Buy Back Assets?
Yes, directors or shareholders can repurchase assets, but the liquidator must ensure a fair market value is paid. Typically, an independent valuer determines asset values to uphold creditor interests.
• Directors’ Responsibilities
Upon the liquidator’s appointment, directors’ powers cease, and their duty shifts to assisting the liquidator as required.
• Starting Another Company with the Same Name
Starting a new company with the same name, known as a Phoenix Company, is possible but requires careful consideration to avoid personal liability for new company debts if it becomes insolvent.
• Directors’ Eligibility for Other Companies
Directors of liquidated companies can serve as directors of other companies, provided they haven’t been bankrupt or disqualified by the courts.
FAQ's
Liquidation involves transferring company control to an insolvency practitioner (IP), who acts as a liquidator to sell assets and distribute funds to creditors.
Liquidation is suitable when a company is insolvent and unable to recover. Alternative procedures like administration or CVA may be preferable if turnaround is feasible.
No, but once in liquidation, creditors direct inquiries to the liquidator, who informs them about potential repayments.
The liquidator’s fees come from the company’s assets. Remaining funds are distributed to creditors, often leaving insufficient funds for payment.
Yes, directors can assume roles in other companies unless disqualified by bankruptcy or court order.
Yes, with precautions to avoid legal repercussions.
HMRC, like other creditors, is dealt with by the liquidator and receives dividends if funds allow. However, they have legal expertise and resources to pursue directors for debts, particularly under wrongful trading provisions.
