Updated: 18th February 2021
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Hundreds of companies across Scotland become insolvent each and every year with many ultimately facing the prospect of liquidation which means the company comes to an end. There are three common types of liquidation; namely Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL) and a winding-up order which is also referred to as Compulsory Liquidation.
If you’re a company director in Scotland and are facing the prospect of liquidation, this breakdown of what each type of liquidation means will help shed more light on your situation:
If a company is insolvent, the directors or shareholders may see no other option but to voluntarily place the firm into liquidation. This is a common route – known as Creditors’ Voluntary Liquidation, where the business is no longer viable and there is nothing to suggest an upturn in fortunes is just around the corner. At this time, debts are often escalating and the company simply cannot afford to pay them on time, or it has more liabilities than assets. A liquidator (a licensed insolvency practitioner) would be appointed with the responsibility of rounding up the company’s assets and realising funds to repay creditors, as documented by law.
A Members’ Voluntary Liquidation differs from a CVL and a compulsory liquidation in one major area – the company is not insolvent. If the company’s debts can be repaid within 12 months through the sale of assets from the company – a process which would be carried out by the liquidator – than an MVL would be the route to take. They are often used as a method of restructuring or reorganisation within the company and can also allow shareholders to realise any interest in the firm. Where Real Business Rescue is particularly experienced in is the knock-on effect with regards to tax; timing plays a major role.
The third type of liquidation isn’t voluntary; it is an enforced action taken by disgruntled creditors – most commonly HMRC due to unpaid tax. If you’ve been served a winding-up order, it is a very serious action and you must seek the advice of a licensed insolvency practitioner should you want to keep your business alive. A must-read for companies in Scotland facing a winding-up order can be seen here. Once the courts have agreed with the petition for winding-up, they would appoint an official receiver (OR) as liquidator. After the liquidation process has started, the company is safeguarded from any legal action brought against it. The liquidation procedure is complete once all the company assets have been realised, all creditors’ claims have been arbitrated (pending sufficient funds) and net funds of the liquidation have been distributed to the creditors once expenses have been taken into account.
As with any liquidation, the news of the company entering this process would be publicised in the Edinburgh Gazette as a means of alerting all creditors.
If your company is facing liquidation and you need free, impartial and expert advice from a licensed insolvency practitioner, contact Real Business Rescue’s director helpline. From here, we can also arrange a free consultation at one of our Scottish offices of which we have four – Aberdeen, Dundee, Edinburgh and Glasgow. An overview of company insolvency in Scotland can be seen here.