What is liquidation?

Liquidation is a legal process used to wind up the affairs of a company when it’s no longer required or viable. Liquidations can be either solvent, or insolvent, such as a Creditors’ Voluntary Liquidation. Our blog explains the differences.

Solvent liquidation

A solvent liquidation is when a company can pay all its liabilities in full, with enough cash/assets left over for the shareholders to draw. This is known as a Members’ Voluntary Liquidation (MVL).

If a company has fulfilled its purpose and the directors and shareholders want to bring the company to a close, an MVL may be a tax-efficient way to do this.

As well as tax benefits, an MVL provides greater protection to the shareholders against future claims, as long as those claims weren’t known about at the start of the MVL.

If the assets are less than £25,000 then an MVL may not be necessary as the directors could apply to strike off the company with the same capital treatment as an MVL.

For more information of the tax benefits of an MVL, please read our brochure entitled ‘What is liquidation?’ You can also get in touch with our Insolvency and Recovery team for a personalised quote.

Insolvent liquidation

An insolvent liquidation is when a company doesn’t have enough assets to pay all creditors in full.

When a company is in financial distress, it’s vital that the directors get advice from either their accountant or a qualified insolvency practitioner. The earlier you get advice, the more options

are available to you.

An insolvency practitioner can discuss the available options, such as an Administration, Company Voluntary Arrangement or a Creditors’ Voluntary Liquidation (CVL). If it’s not possible to rescue even a part of the business, then it’s likely that a CVL will be the best option to deal with the controlled wind-up of the company.

Once an insolvency practitioner is appointed as liquidator, it’s their role to realise the company’s assets and, if possible, pay dividends to creditors.

Employees are entitled to claim for any arrears of wages, holiday pay, notice pay and redundancy pay from the Redundancy Payments Service. See our brochure entitled ‘Liquidation: What it means for employees’ for further information.

The liquidator will realise the assets of the company for the best possible value. This often involves a sale to the former directors, shareholders or employees. The liquidator will also have a duty to review the conduct of the directors. If there have been any inappropriate actions, the liquidator can bring claims against the directors to recover the assets which were put out of the reach of creditors.

The liquidator’s fee will generally be paid from the realisation of the assets, therefore the directors are not personally liable to these. 

For more information about the process of a CVL, please read our liquidation brochure.

Compulsory winding-up by the court

Both an MVL and a CVL are initiated by the company directors. However, if a company is unable to pay its debts but doesn’t seek advice from an insolvency practitioner, a creditor who’s owed more than £750 may go to court to seek a winding-up order.

If the court grants the winding-up order, the Official Receiver (OR) is appointed as liquidator. The OR is a government official who’ll deal with the statutory process of the liquidation. If there are significant or complex assets to be recovered, the OR may offer the appointment to an insolvency practitioner. Alternatively, a creditor can request that an insolvency practitioner is appointed.

As with a CVL, the liquidator will try to recover assets, where possible

Need help?

Our Insolvency & Recovery team can help with all types of liquidations. We advise directors to speak to us as soon as possible so that all options can be considered.

We have two licensed insolvency practitioners with a combined sixty years’ experience. For further advice, please get in touch. Call 0330 024 0888 or email enquiry@larking-gowen.co.uk.

Sebastian Hall