Updated: 14th October 2020
Shareholders may decide to place their company into liquidation for a variety of reasons. Sometimes the business serves no further purpose, and a formal liquidation process means it can be closed down in an orderly manner.
In other circumstances it may be insolvent and unable to pay its creditors, in which case the directors and shareholders can take the decision to voluntarily place their company into liquidation.
This complies with the stringent insolvency laws in place in the UK - these demand that directors place the interests of their creditors first when their business has entered insolvency.
There are essentially two main types of company liquidation:
Solvent liquidation means the company can pay all its creditors within 12 months. An insolvent liquidation, on the other hand, involves shareholders agreeing to liquidate their company because there’s no hope of recovery.
Compulsory liquidation is another form of insolvent liquidation, but shareholders have no involvement in putting the company into liquidation. In this case a creditor petitions the court to wind up the company.
So let’s look in more detail at what happens when shareholders place their company into solvent and insolvent liquidation.
Members’ Voluntary Liquidation is typically chosen as a way to close down a business by shareholders/directors wishing to retire, or simply wanting to close in an orderly way when the business has served its purpose and is no longer required.
The process must be administered by a licensed insolvency practitioner (IP), and initially, the directors sign a Declaration of Solvency to state that the business can repay its debts within 12 months.
The company’s directors instigate the process but to put the plan into effect, members need to pass a special resolution at a meeting of shareholders. A licensed IP then takes control of the business and sells its assets to repay any debts. Ultimately the company’s name is struck off the register at Companies House.
Creditors’ Voluntary Liquidation offers shareholders and directors the opportunity to put their creditors first when business debts cannot be paid. Directors can be held personally liable for the debts of the business if they increase creditor losses by continuing to trade, so this is an important issue.
If 75% or more of shareholders (by value of shares) vote in favour of putting the company into liquidation, a special resolution is passed and the liquidator takes control of affairs. Creditors are informed of the company’s situation by the liquidator, who goes on to realise any business assets as with a Members’ Voluntary Liquidation.
The shareholders must pass a special resolution to place their company into liquidation. They play a fundamental part in commencing the process, as without a 75% vote in favour, an insolvent company cannot enter a CVL.
It’s advisable to seek professional assistance at an early stage if you’re considering a solvent liquidation, but this is crucial if the business is experiencing financial distress and you believe you may be approaching insolvency.
If you would like more information or guidance on how shareholders can place their company into liquidation, please contact one of our partner-led team. Real Business Rescue are liquidation experts and will provide sound, reliable advice. We also offer same-day consultations free-of-charge, and operate an extensive network of offices around the country so you’re never far away from professional advice.
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