A company is an artificial legal entity that stands on its own. Its effective birth is registration and its effective death is dissolution. Liquidation is simply the process by which a company’s assets are realised and distributed to those parties legally entitled to them, so that it can be dissolved.
There are three main types of company liquidation. The type of liquidation that the company goes through can depend on a number of reasons. One of the main reasons that determines what type of liquidation the company goes through is whether or not the company is solvent.
Members Voluntary Liquidation (MVL). This type of liquidation usually occurs when the company is able to pay off its debts. Other reasons may include the directors of the company wishing to go separate ways or because of the death of the owner of the company. The decision to voluntarily liquidate the company must be approved by the shareholders of the company. Companies that go through the MVL procedure must declare that they are solvent and able to pay off debts within a twelve-month period. If a company turns out to be insolvent and cannot pay off its debts within this time then it could face penalties.
Creditors Voluntary Liquidation (CVL). This process is similar to the MVL procedure but more difficult for the company as it is usually the process chosen by insolvent companies. A Creditors Voluntary Liquidation may involve more problems with creditors, as the company will face difficulties paying off debts. During the CVL procedure, a liquidator will investigate the company. The process is less straightforward than a Members Voluntary Agreement and there is more chance of problems occurring.
Compulsory Liquidation (CL). This method of liquidation involves the company being given a winding up at court. The creditor will ask the High Court to hear a “Petition” to wind the company up. If the Court agrees and or the debt is not paid, then a “hearing” is held say 40-60 days later, typically in front of a High Court judge who then passes an order to wind the company up compulsorily. A Winding up petition can also be presented by the directors of the company. If there is more than one director, all the Directors must present the winding-up petition jointly – a single director cannot present a winding-up petition.
When a company goes into liquidation the Directors no longer have any control over it and the liquidator takes over. You have a duty to co-operate with the liquidator and must identify all assets and liabilities of the company and provide details of its affairs. The liquidator has to make a return under the Company Directors’ Disqualification Act 1986 about the directors’ conduct in relation to the company.
Before you take any action to put a company into liquidation, you should get advice about the process. You can get advice from your local Citizens Advice Bureau, a solicitor, a qualified accountant, an authorised insolvency practitioner, any reputable financial adviser or a debt advice centre.
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