Understanding the liquidation process: a quick guide.

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The Company Liquidation Process.

The liquidation process is commonly seen as a complex and difficult landscape to navigate. Often company owners are overwhelmed by complex terms and lengthy legislation descriptions.

Whether you are looking into liquidating your company because it is experiencing financial difficulties and under creditor pressure or because you wish to dissolve your no longer needed company, understanding the basic steps of the liquidation process can help take some of the mystery away and ease any anxiety.

What is Liquidation?

In simple terms, a liquidation is an official process to close down a limited company. During the liquidation an appointed licensed liquidation professional will sell all your company assets and, in the case of an insolvent liquidation, distribute all the net proceeds between your company’s creditors.

In the case of a solvent liquidation, once creditors and costs have been paid in full the remaining funds will be distributed equally between the company’s shareholders.

Types of Liquidation

Creditors’ Voluntary Liquidation (CVL)

Initiated by: Company shareholders.

Reason: The company is insolvent and cannot pay its debts.

Process in short: Shareholders appoint an Insolvency Practitioner (although the creditors replace them with their own choice of Insolvency Practitioner) who takes on the role of selling company assets and uses the proceeds to pay off creditors as far as possible.

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Members’ Voluntary Liquidation (MVL)

Initiated by: Company shareholders

Reason: The company is healthy and solvent but the directors wish to close it down for reasons such as retirement or capital release.

Process in short: Directors sign a declaration of solvency, shareholders appoint an Insolvency Practitioner to sell off assets, debts are cleared with the proceeds and the remaining funds are shared between company shareholders.

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Compulsory Liquidation

Initiated by: Usually creditors through a court order.

Reason: The company is insolvent and not paying its creditor debts.

Process in short: A creditor submits a winding-up petition to the court and the company, if the courts agree a winding-up order is made.

An Official Receiver is appointed to carry out the initial stages of the liquidation, often passing over to an Insolvency Practitioner to carry out the full liquidation process.

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What is the liquidation process?

This is a brief overview of the company liquidation process and not an exhaustive list of every element of the process.

Your Insolvency Practitioner will be able to guide you through your individual process stage by stage.

Step 1: Decision to liquidate

For voluntary liquidation options (CVL & MVL), the decision to liquidate starts with you and any other company directors. For a CVL, you will recognised that your company is insolvent and decided to stop trading.

For MVL, the directors decide that the company’s purpose has been fulfilled and a professional and strategic closure is needed.

Step 2: Instructing an Insolvency Practitioner

The directors instruct an Insolvency Practitioner to help them meet the legal requirements to start the liquidation. This includes asking the shareholders to pass a resolution to start the liquidation and appoint a liquidator and, for CVLs, inviting creditors to make certain decisions (see Step 3). Appointing a licensed Insolvency Practitioner as a liquidator is a legal requirement for any company liquidation process. They will manage the entire process, including asset valuation, sale of assets, and distribution of net proceeds to creditors and, where possible, to shareholders.

Step 3: Creditors’ Decisions (CVL)

In the CVL process, creditors are invited to agree on the choice of Insolvency Practitioner as liquidator. In some cases, this involves having a creditors’ meeting (either virtually or physically) during which they may ask questions.

Step 4: Asset realisation

The Insolvency Practitioner will take control of you company assets, which will be valued and liquidated.

Step 5: Distribution of funds

After selling the assets, the Insolvency Practitioner will distribute the proceeds according to the statutory order of payment:

Secured creditors
Preferential creditors
Unsecured creditors
Shareholders

Step 6: Final report and dissolution

Once all your company assets have been sold and all company debts settled as far as possible, the Insolvency Practitioner prepares a final report outlining the liquidation process and the financial outcomes. This report is then sent to Companies House and usually 3 months later your company is formally dissolved and ceases to formally exist.

This is a brief overview of the company liquidation process and not an exhaustive list of every element of the process.

Your Insolvency Practitioner will be able to guide you through your individual process stage by stage.

The Liquidation Centre.

The Liquidation Centre offers expert liquidation advice for both solvent and insolvent companies. Our in-house liquidation team have years of experience in keeping the process as simple and understandable as possible. If you are suffering with creditor pressure or want to close down your no longer needed limited company contact us today.

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