A Step-by-Step Guide to the Liquidation Process

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

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 liquidation process can be voluntary or it can be court-ordered, with the end game in either case being to ‘liquidate’ the company.

If you’re considering liquidating your company as a response to insolvency, Irwin Insolvency has the expert advice you need to initiate the liquidation process. Keep reading, as our insolvency specialists provide a step-by-step guide to the liquidation process.

What Is the First Step in the Liquidation Process?

The end result of the liquidation process is the sale of a company’s assets in order to pay its creditors, a process that ultimately leads to the company being closed down and struck from the Companies House register.

But what’s the first step in the liquidation process? And how does a business reach the point where liquidation is the best option for it?

Any liquidation process 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. The directors may also want to sell the company, start a new venture or simply retire.

When a company becomes insolvent and is no longer able to pay its debts, then liquidation is often the last resort. This can be the result of bad business decisions, a poor economic climate or events outside of the company’s control. As we’ll explain, directors can also liquidate a company before it becomes insolvent.

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.

Because there are three different types of liquidation that a business can undertake, after this initial decision has been made, the liquidation process varies.

The three forms of liquidation are:

Let’s take a look at the different types of liquidation and the processes behind them in more detail.

Members’ Voluntary Liquidation

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

An MVL is 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.

An MVL is the simplest liquidation process. 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.

Creditors’ Voluntary Liquidation

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

An insolvency practitioner must be hired to oversee the liquidation and sell off assets. The sales generated are then distributed amongst the creditors.

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

Compulsory Liquidation

Compulsory liquidation follows a different process to voluntary liquidation because, in this situation, the creditors are attempting to liquidate the company against the will of its directors.

Compulsory liquidation can occur when a creditor has tried and failed to secure money owed to them. The creditor asks the court to issue a winding-up petition in order 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.

Now, let’s take a look at the step-by-step process that each type of liquidation follows, so you can better understand what happens.

Step-by-Step Process for MVL

Initiating an MVL is a voluntary process, and it can only be done when the business is still solvent. This means that the actual process of liquidating a company through an MVL is much more straightforward than other forms of liquidation.

Here’s the step-by-step process for a members’ voluntary liquidation.

  1. Company directors make the decision to voluntarily liquidate the business. This may be to make a profitable sale, or because owners wish to retire, start a new business, etc. The business must be solvent in order to begin the MVL process.
  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.

Step-by-Step Process for CVL

Like an MVL, a CVL is still voluntary. The liquidation process is more complicated however, because at this stage the company is insolvent. This means that assets must be sold off, then the profits must be distributed amongst creditors – a situation that can lead to tensions amongst competing creditors.

Here’s the step-by-step process behind a creditors’ voluntary liquidation.

  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. At the same time, the insolvency practitioner must 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 in order 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 are found to have acted against the interests of the company, they may be disqualified from being a director in future and they may even be held personally liable for certain company debts. In practice, disqualification is rare unless serious misconduct or fraud has occurred.
  8. The final step is to close the company and strike its name from the Companies House register.

Step-by-Step Process for Compulsory Liquidation

Compulsory liquidation is the most challenging process to go through, as it’s instigated against the will of the company directors. Compulsory liquidation is a process that must go through the courts and, as such, it’s more complicated than other forms of liquidation. We should note that compulsory liquidation only usually occurs after creditors have attempted all other means of recouping the money owed to them by the company.

Here’s the step-by-step process behind 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 in order 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. However, you can still negotiate with creditors before the winding-up petition is advertised, although you need to act rapidly to avoid liquidation at this point in the process.
  5. Next, the courts will approve a winding-up order if they believe the creditors have the right to liquidate your company. The next stage of the process is the sale of company assets, the distribution of funds and the 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 process will investigate the actions of the directors in relation to the company’s insolvency. If any wrongdoing is found, then the Insolvency Service can disqualify the directors or take other appropriate action against them.

What Is the Proper Sequence of the Liquidation Process?

The liquidation process sees all assets sold off in order to pay creditors, but not all creditors stand to make their money back. There’s a proper sequence that insolvency practitioners must legally follow as they distribute the funds made from the liquidation.

First, the liquidators must cover their own costs. After they’ve taken their payment, then secured creditors will be given their share of the proceeds. Secured creditors commonly include banks or any lenders that have issued secured loans to the business.

Next, come the unsecured creditors. This includes employees and staff who are still owed salaries, as well any suppliers who have given credit in good faith. If there’s anything left over after this, the remainder is divided between shareholders.

How Long Does the Liquidation Process Take?

The length of time the liquidation process takes can vary from one company to the next.

It depends on the type of liquidation occurring and the size of the company being liquidated. If a small company elects to undertake an MVL for example, this voluntary process could be completed in as little as a week if the right buyers are found quickly.

If it proves difficult to sell assets or if legal opposition is met, then it can take much longer than this. A difficult liquidation process that involves a large company and multiple creditors could take 6 to 12 months to complete. A compulsory liquidation is necessarily going to last much longer than a voluntary liquidation, as opposition is going to be met.

Ultimately, the more cooperation there is between all parties involved, the smoother and quicker the liquidation process will be.

Contact Irwin Insolvency Today for More Information on the Insolvency Process

The liquidation process leads to the winding up of a business, with all assets sold to pay creditors and the company ultimately being struck from Companies House register.

It’s not 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 your company, Irwin Insolvency’s experienced team can help you to decide which insolvency measures are most appropriate for your business.

For more detailed information on the liquidation process, contact Irwin Insolvency for your free, no-obligation consultation.

Contact Irwin Insolvency today for your free consultation

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About the author

Gerald Irwin

Gerald Irwin is founder and director of Sutton Coldfield-based licensed insolvency practitioners and business advisers, Irwin Insolvency. He specialises in corporate recovery, insolvency, rescue and turnaround.