What happens when a company goes into liquidation?

November 7, 2017 / FAQs

We outlined how the first quarter of 2017 showed a rise in corporate insolvencies but what actually happens when a company goes into liquidation?

A quick overview of liquidation

Many companies that are facing the prospect of liquidation undoubtedly have many questions about the process. Depending on which type of liquidation your company is going through, the process will differ slightly but the end result will generally be the same. When a company goes into liquidation the assets are sold and the creditors are paid what they are owed (or as much as possible) and the company is then closed. It also depends whether you are choosing to liquidate your solvent company, whether you’re opting to close your insolvent company, or if you have been forced to close your insolvent company by a court petition. We’ll outline the differences below.

Members Voluntary Liquidation (MVL) / Solvent Liquidation

Closing your solvent company can be done in a few ways however a Members’ Voluntary Liquidation (MVL) could be the most tax-efficient way to do so depending on how much cash there is in your company.

This process is extremely straightforward as your company isn’t in any debt and you’re choosing to close your company and walk away. It involves your accountant making all the relevant tax calculations to see whether you qualify for Entrepreneurs’ Relief and whether an MVL is indeed the right course of action. If it is, an Insolvency Practitioner must be used, such as Clarke Bell, and we aim to have the assets of the company distributed within 35 days.

The whole process can be carried out via email which means there’s no need for any face to face meetings at all.

Creditors’ Voluntary Liquidation (CVL)

As a director, you can propose a Creditors’ Voluntary Liquidation (CVL) if your company cannot pay the debts that it owes and the shareholders agree with the decision and pass a winding up resolution. Again, this process is relatively straightforward depending on the complexity of the case. It needs to be demonstrated that liquidating the company is the best possible course of action for the creditors that are owed money. Then the company will stop trading, be liquidated and the assets distributed to the relevant creditors. This can be the best course of action if your company is insolvent as it is a voluntary process and it acknowledges your duties as a director to your creditors.

Again, there is usually no need for any face-to-face meetings with a CVL.

Compulsory Liquidation

This type of liquidation is the most serious and the most damaging to directors. It occurs when a creditor tries to force your company to close in order to recoup the debts they are owed. First, a creditor must be owed more than £750 by your company and then they can issue a winding up petition to the court. It is subject to the regulations of the Insolvency Act 1986 and if they are successful, your company will be forced into liquidation, closed and your company assets sold to pay the debts you owe. After 2-3 months your company will be removed from the register.

This process can be more complicated and more stressful due to the compulsory nature. It’s essential to get Compulsory Liquidation advice if you feel your company is heading in this direction.

Clarke Bell are licensed insolvency practitioners that can advise on any type of liquidation and have worked with a range of small to medium sized businesses, giving them tailored advice. Our initial advice is free and we offer a nationwide service. Contact us today for help with your company 0161 6907 4044 / info@clarkebell.com