Liquidation is the process of winding up your company’s affairs and closing it. It involves selling off your company’s assets and using the proceeds to pay off debts if possible. If there’s any remaining funds, they’re distributed to the shareholders. Once the process is complete, the company is dissolved and formally removed from the Companies House register.
So yes, liquidation does mean closing your company but it is not necessarily the end of the business.
For some people, closing is the desired result. But for others, liquidation may mean the opportunity to remove debt from their business and gain a fresh lease of life.
Types of liquidation
There are several reasons a company may decide to liquidate. One of the most common is poor financial health or insolvency: when a company is unable to pay its debts. Companies who are in good health might also choose liquidation as a way of closing tax efficiently.
There are three types of liquidation that cover different business situations:
Members’ Voluntary Liquidation (MVL)
A Members’ Voluntary Liquidation, or MVL, is when the directors and shareholders of a solvent company decide to close down the business. They appoint a licensed insolvency practitioner to act as liquidator, voluntarily cease trading and sell off the company’s assets if they are not already in a cash form. The proceeds are used to pay off creditors and the leftover funds are distributed to shareholders. An MVL is generally the most efficient way for a solvent company to liquidate.
Creditors’ Voluntary Liquidation (CVL)
A Creditors’ Voluntary Liquidation, or CVL, is when the directors of an insolvent company voluntarily appoint a liquidator to dissolve the business. Trading ceases and assets are sold off to pay creditors. However, the company must be declared insolvent and creditors are able to vote on the appointment of the liquidator. A CVL is preferable to compulsory liquidation as it allows the directors more control over the process.
Also known as a winding-up order, compulsory liquidation is when a court orders that a company is liquidated. This usually happens if a creditor petitions the court, for example if the debtor company cannot pay its debts.
A licensed insolvency practitioner is appointed by the court to sell off assets and distribute proceeds to creditors. Compulsory liquidation can generally be avoided if you seek help for your company’s financial issues before your creditors feel it’s necessary to take such extreme action. Sometimes it is possible to still go into voluntary liquidation even if the compulsory liquidation process has started.
Restarting your company after liquidation
In some cases, we may be able to use a CVL to close down your company and re-open the business under a new one. We call this a Start Afresh Liquidation. This process gives your business a second chance, enabling it to get back into a healthy position free of historic debts.
There are certain rules that must be followed very carefully, which is why a licensed insolvency practitioner’s involvement is crucial.
Are you thinking about using liquidation to close your company?
Liquidating a company is sometimes the most viable option in certain situations. Understanding the pros and cons can help business owners make an informed decision.
If your company’s debts exceed its assets and there’s no potential turnaround, liquidation provides a legal process to shut down operations. It also means that your creditors are able to get the fairest treatment.
For solvent companies, there are often tax advantages.
It’s our role as your licensed insolvency practitioner to help you make the best decision for yourself, your creditors and your future.