How to liquidate a company

Find out how you can close down a solvent or insolvent company

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.

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Can I liquidate my own company?

Whatever 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.

What are the different types of liquidation?

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.

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What is the process to liquidate a company?

If you choose to liquidate your company voluntarily via an MVL or CVL, this is what the process will look like. 

• Appoint a liquidator - The directors appoint a licensed insolvency practitioner to act as the liquidator and manage the process. 
• Declaration of solvency by directors - In an MVL, directors must sign a Declaration of Solvency before the process can begin. It states that the business can pay all its debts within 12 months.  
• Meeting of directors - The directors must meet to make a ‘Special Resolution to Wind Up’.
• Call a shareholders meeting - The shareholders can then vote on whether to pass the resolution to liquidate the company. The resolution is passed if 75% of shareholders (by the value of shares) agree.
• Notify the relevant parties - The liquidator must inform Companies House, company employees, creditors and other relevant parties of the decision to liquidate. 
  Prepare a Statement of Affairs - A detailed report of the company’s assets and liabilities must be prepared. In a CVL, this must also include information such as creditors’ names and the value of their debt. 
• Sale of assets and distribution of funds - The liquidator must collect and sell the company’s assets and the creditors should be repaid. Any remaining funds can be distributed to the members. 
• Dissolving the company - The liquidator will file final documents with Companies House before removing the business from the Register of Companies. It will then cease to exist.  

What role do company directors play during liquidation?

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.   

What happens after I’ve liquidated the company?

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.  

Do I have to pay to liquidate my company?

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. 

Do you need help liquidating a company?

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.