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What Is Liquidation?

When approached with business financial difficulties or the natural need to close a company, the first question many directors ask is “what is liquidation?”. Liquidation is the legal process by which a company stops trading and ceases to exist. Once liquidation has been completed, the business will be removed from the register at Companies House. Employees are made redundant and any assets are used to pay off outstanding company debts and fees.

This can happen for a variety of reasons, including when the business has become insolvent and is unable to pay its debts or when the members decide to close the company because the owner is retiring or company no longer has a purpose. The process for a CVL can take as little as ten days to complete but must involve a licensed insolvency practitioner. A compulsory liquidation takes longer because it goes through the courts.

In the UK, there are three types of company liquidation:

Creditors Voluntary Liquidation (CVL):

If a company is unable to meet its debts, the directors and shareholders can agree to move the company into liquidation. The assets from the company are then used to pay any outstanding debts to creditors.

Members Voluntary Liquidation (MVL):

If a company can meet its debts but the shareholders and directors want to close the company, perhaps because the owner is retiring or the company no longer has a purpose, they can also choose to liquidate.

Compulsory Liquidation:

The company is unable to meet its debts and there is an application to the courts to liquidate it. This can be initiated by either the company itself, a director or a creditor who is owed money. Again, debts are paid by the sale of any assets that the company has.

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