Liquidation Process: A step-by-step guide

The liquidation process sees a company wound up, closed down, and struck from the register at Companies House.

Whether your business is solvent or insolvent, navigating liquidation can be complex – with serious legal and financial implications.

From ensuring legal compliance to safeguarding your professional interests as a director, seeking reliable company liquidation advice from an insolvency expert is essential.

What is liquidation of a company?

Liquidation commonly occurs when a company can no longer pay its debts, resulting in company assets being sold off in order to pay creditors.

The company liquidation process can be voluntary or court-ordered, with the end game in both cases being to ‘liquidate’ the company.

Understanding company liquidation

Liquidating a company usually begins with the company directors recognising that the business is in financial difficulty or expressing a desire to close the company down – profits may be down, sales stagnating, or creditors may be hounding the accountants to be paid.

Alternatively, they may want to sell the company, start a new venture, or simply retire.

Or, when a company becomes insolvent and is no longer able to pay its debts (either due to bad business decisions, a poor economic climate, or events outside of the company’s control), then liquidation is often the last resort.

In any case, the first step in the liquidation process is for the company directors to seek impartial advice from an insolvency expert, before convening a meeting with shareholders to announce the intended liquidation.

There are three different types of liquidation that a business can undertake with varying processes.

The three forms of liquidation are:

• Members’ voluntary liquidation
• Creditors’ voluntary liquidation
• Compulsory liquidation

How to liquidate a company

Members’ Voluntary Liquidation

A members’ voluntary liquidation (MVL) involves the liquidation of a company that’s been voluntarily entered into by a company’s directors and shareholders when the business is still solvent.

Often used to wind a company up when business is still strong and a profit can be made, or when the company’s owners wish to retire or move on to new things, MVL is the simplest type of company liquidation.

Directors and shareholders come to an agreement, and the company is sold off and liquidated. No court orders are involved, and profits are divided between shareholders once any last payments to creditors have been made.

Step-by-step process for MVL

1. Company directors make the decision to voluntarily liquidate the business while it’s still solvent.
2. The directors appoint a licensed insolvency practitioner to oversee the liquidation.
3. A Declaration of Solvency is sent to Companies House and a winding-up resolution is agreed upon by the directors in conjunction with the insolvency practitioner. The resolution effectively agrees on the terms of the liquidation process.
4. The liquidation of the company is made public knowledge, and must now be formally advertised in the Gazette. Any creditors must be informed of the impending liquidation.
5. The company goes through the winding-up process. Employees must be informed, and all assets are sold off.
6. Profits from the sales are used to pay outstanding creditors and the remaining profit distributed amongst shareholders.
7. Finally, the company is struck from the Companies House register and ceases to exist.

Creditors’ Voluntary Liquidation

Creditors’ voluntary liquidation (CVL) is a process of liquidation whereby the company directors realise its insolvent position and come to an agreement with creditors to voluntarily liquidate the business.

More complicated than MVL as the company is insolvent at this stage, an insolvency practitioner must be hired to oversee the CVL and sell off assets.

Once the company’s assets have been sold and distributed amongst the creditors, the company is struck from the Companies House register and ceases to exist.

Step-by-step process for CVL

1. The company directors realise their financial position to be one of insolvency and seek advice from an insolvency practitioner.
2. If the company cannot be saved through a business turnaround, corporate restructuring or other insolvency measures, then the insolvency practitioner will suggest a creditors’ voluntary liquidation.
3. The insolvency practitioner creates a winding-up resolution, which must be voted on by shareholders. 
4. The practitioner must also notify creditors of the company’s insolvent position and impending liquidation. Creditors will be able to oppose the resolution or suggest their own choice of an insolvency practitioner.
5. Once the winding-up resolution has been voted through, the liquidation is formally advertised in the Gazette and becomes public knowledge. Companies House and the Insolvency Service are informed of the liquidation, and the process of winding the business up begins.
6. The insolvency practitioner sells the company’s assets to raise funds, while employees will be given notice of the intent to close. Once all assets have been liquidated, the funds generated are distributed amongst creditors.
7. The insolvency practitioner must also investigate the conduct of the company directors and present their findings to the Insolvency Service. If directors have acted against the interests of the company, they may be disqualified from being a director in future (though this is rare unless serious misconduct or fraud has occurred) and could be held personally liable for certain company debts.
8. The final step is to close the company and strike its name from the Companies House register.

Compulsory Liquidation

Compulsory liquidation differs to the voluntary liquidation process as it involves creditors attempting to liquidate the company against the will of its directors after all other attempts to recover unpaid debts have failed, making it the most challenging process to go through.

The creditor asks the court to issue a winding-up petition to pressure the company to make payment. If this fails, a winding-up order is issued by the courts, and the directors lose control of their company.

An insolvency practitioner is selected to wind the company up and sell off its assets. The creditors receive their share of the funds generated from the liquidation, and the company is struck from the register.

Step-by-step process for compulsory liquidation

1. A creditor tries and repeatedly fails to recover money owed to them by a company. As a last resort, the creditors decide to force the company into liquidation to recover the money owed to them.
2. First, the creditors must issue a Statutory Payment Demand. The debt must be £750 or more, and the demand gives the debtor a final 21 days to pay the money they owe.
3. If the Statutory Payment Demand goes unpaid, the creditors will organise a winding-up petition to be approved through the courts. This essentially petitions the court to allow the company to be liquidated in order to pay the debt.
4. If the winding-up petition is approved, it will be advertised in the Gazette and an appointed insolvency practitioner will liquidate the company. You can still negotiate with creditors before the winding-up petition is advertised, but you’ll need to act rapidly to avoid liquidation.
5. Next, the courts will approve a winding-up order if they believe the creditors have the right to liquidate your company, leading to the sale of company assets, distribution of funds, and closure of the business. Once the company has been liquidated, it’s struck from the Companies House register.
6. As with a CVL, the insolvency practitioners overseeing the liquidation will investigate the actions of the directors in relation to the company’s insolvency. If any wrongdoing is found, then the directors may be disqualified or have other appropriate action against them.

How long does it take to liquidate a company?

The length of the liquidation process in the UK varies significantly depending on factors such as the size of the company, degree of legal opposition, and number of creditors.

As a result, the business liquidation process can last anywhere from just a week to over a year. Ultimately, the more cooperation there is between all parties, the smoother and quicker the process will be.

Receive expert business liquidation advice

We understand that liquidation is never an easy decision to make, but for many companies, a voluntary liquidation process can be the best way to close down the business.

If you’re considering liquidating a company in the UK as a response to insolvency, Irwin Insolvency’s experienced team has the expert advice you need to decide which insolvency measures are most appropriate for your business and initiate the liquidation process.

To learn how to liquidate a limited company or for more liquidation advice, contact Irwin Insolvency for your free, no-obligation consultation.  

Call: 0800 254 5122

Email: mail@irwinuk.net