
Understand your company's position and learn more about the options available
Require Immediate Support? Free Director Helpline: 0800 644 6080
Free Director Helpline: 0800 644 6080
Updated:
Liquidation is the formal process of closing down a limited company. It can be done in three ways, two of which are voluntarily initiated by the company directors while one is the result of creditor action (Compulsory Liquidation). In this article, we’ll explain how you can liquidate a company, what happens in each of the three liquidation processes and the role you play as a company director.
Get an instant understanding of your:
Plus much more ...
Start The 60 Second TestWhatever liquidation process is right for your circumstances, you will require professional assistance from a licensed insolvency practitioner. In the case of the two voluntary liquidation procedures - Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) - an insolvency practitioner will talk you through your options and make sure liquidation is the best option for you and your business. If it is, they’ll assume control of the business, communicate with outstanding creditors on your behalf and handle the process from start to finish.
In Compulsory Liquidation, the company’s creditors initiate the process. Here, the Official Receiver - the government’s version of an insolvency practitioner - could be appointed. They will take control of your business and realise your assets for the benefit of your creditors before closing the company down. They may also file a report about your conduct as a director, which could lead to action being taken against you.
Liquidation, whether voluntary or compulsory, is the process of bringing a company to an end and realising its assets for the benefit of its members (directors and shareholders) or its creditors (the people it owes money to). The type of liquidation you use depends on the circumstances you are in.
Members’ Voluntary Liquidation (MVL)
This is the process you use to close down a business that is solvent and still able to trade but that the directors no longer want to run. It could be that the directions want to retire and there’s no one to carry on the business or they want to try something new.
To begin the process, the company directors must make a formal Declaration of Solvency, which states that there is enough value in the company and its assets to repay all the company’s creditors, plus statutory interest, within 12 months. The shareholders can then convene a general meeting and pass a resolution to begin the process.
An insolvency practitioner of the directors’ or shareholders’ choosing can be appointed to wind up the company. Acting as the liquidator, the insolvency practitioner will realise the business’s assets at a fair value, repay any creditors and distribute the rest of the money among the shareholders before dissolving the company.
The benefit of a Members’ Voluntary Liquidation over other methods of closing a solvent business is that it allows the shareholders to extract funds from the company in a tax-efficient way. Money taken from a company via an MVL is subject to capital gains tax rather than income tax. You can also claim Business Asset Disposal Relief to reduce the CGT to just 10% up to a lifetime limit of £1 million.
Creditors’ Voluntary Liquidation (CVL)
If the business is insolvent, the duties of the company directors switch and you must act in the best interests of your creditors. The first step in this process is to contact an insolvency practitioner. They will be able to advise you about the best route forward and whether there could be other options, such as a Company Voluntary Arrangement (CVA), which could enable the business to keep trading.
If it’s decided that the company is no longer viable and no other avenues are available, the shareholders must pass a resolution to wind up the company at a general meeting. You can then nominate an insolvency practitioner to act as the liquidator. They will take control of the company, realise its assets and distribute the proceeds to the creditors before winding up the company’s affairs.
Choosing to wind up an insolvent company voluntarily does provide certain benefits. First, the directors can choose who to appoint as the liquidator and they have some control over the timing of the liquidation. It also shows that you are acting responsibly and not worsening the position of creditors by continuing to trade. This reflects favourably on your conduct as a director and reduces the risk that you will be made personally liable for company debts or banned from operating as a director.
Compulsory Liquidation
If you don’t pay a debt owing to a creditor, such as a supplier, bank or HMRC, they can issue a Winding Up Petition against you that could end up in a Winding Up Order being made by the court. Once a Winding Up Order has been made, an Official Receiver will be appointed to handle the Compulsory Liquidation process. They will assume control of your business and identify and sell any assets for the benefit of your creditors before closing your company down.
As the liquidation has been forced by your creditors, you will not be able to choose the insolvency practitioner or the timing of the process. The liquidator will also investigate the conduct of the directors in the time leading up to the liquidation. If it shows that wrongdoing occurred, you could be made personally liable for company debts or even face a director disqualification.
Is your company insolvent?
If your company is insolvent you have a number of legal responsibilities that you must adhere to. Taking steps to protect creditors from further losses by contacting a licensed insolvency practitioner can help ensure you adhere to these duties.
The team are available now - 0800 644 6080
Get an instant understanding of your:
Plus much more ...
Start The 60 Second TestIf you choose to liquidate your company voluntarily via an MVL or CVL, this is what the process will look like.
When you enter liquidation, your duties as a director change significantly. Your usual powers and responsibilities will end and you will no longer have control of the company. Although you can no longer make decisions about the business, you will be expected to help the liquidator wind up the company’s affairs by handing over documents and other information they need.
The first job of a company director in a voluntary liquidation will usually be to assist the liquidator in preparing the Statement of Affairs. This is effectively a handover document that brings the liquidator up to date on all matters regarding the company. It should include a list of employees, creditors and suppliers, asset valuations, a recent balance sheet and full details of any debts. In Compulsory Liquidation, the liquidator will prepare the Statement of Affairs.
In an insolvent liquidation - that’s a CVL or Compulsory Liquidation - you may also be asked for an interview by the liquidator so they can establish how the company was run and the reasons for its decline. You are legally required to attend the interview and answer the questions as best you can.
Generally speaking, the limited liability company directors have protects them from personal liability for company debts in insolvent liquidations. However, if you have signed a personal guarantee, have an overdrawn director’s loan account or there is evidence of director misconduct, you could be held liable for some or all of the company’s debts.
Once you’ve liquidated the company, the business will cease to exist as a legal entity. In a Members’ Voluntary Liquidation, there are no restrictions on what you can do next, whether you want to retire, set up another business or get a job.
In an insolvent liquidation, as long as the liquidator has no concerns about your conduct, you will face no further action and you will be free to set up a new limited company. However, if you are planning to set up a new business within the same industry, there are rules around so-called ‘phoenix companies’ that you should be aware of.
You will have to pay the professional fees of the insolvency practitioner who will act as the liquidator. In a lot of cases, these fees are covered by the sale of company assets, so you may not have to pay anything personally. The costs will depend on the size of the company, how many assets it has and the complexity of the liquidation.
If the company does not have assets to cover the cost of liquidation, you may have to pay the fees personally. This can sometimes be covered by directors’ redundancy pay, which you may be eligible for.
If you’re thinking of liquidating your solvent or insolvent company, speak to our insolvency practitioners at your earliest opportunity. We will provide a free, confidential and no-obligation consultation to help you understand your options for closing your company. Call our team today or find your nearest office for a face-to-face meeting.
Still unsure whether liquidation is right for your company? Don't worry, the experts at Real Business Rescue are here to help. Our licensed insolvency practitioners will take the time to understand the problems your company is facing before recommending the best course of action going forward based on your own unique circumstances.
Complete the below to get in touch
For Ltd Company Directors
Get An Instant Understanding Of Your:
Plus much more ...
We provide free confidential advice with absolutely no obligation.
Our expert and non-judgemental team are ready to assist directors and stakeholders today.
Understand your company's position and learn more about the options available
Find your nearest office - we have more than 100 across the UK. Remote Video Meetings are also available.
Free, confidential, and trusted advice for company directors across the UK.