Types of Company Liquidations

There are two types of liquidation as detailed below. If you plan on liquidating a company, Irwin & Company have a vast experience of dealing with company liquidations and will assist you with all the necessary procedures.

Creditors’ Voluntary Liquidation (CVL)

CVL’s are determined by the realisation that the business cannot pay debts as and when they fall due. Creditors’ Voluntary Liquidation is often referred to as a ‘voluntary winding-up’ and is initiated by the directors and shareholders of a business.

What is the Creditors’ Voluntary Liquidation involve?

This is done by the company appointing a liquidator, who must be a licensed insolvency practitioner, who is hired to liquidate all company assets. During liquidation, the insolvency practitioner will continue to liaise with creditors, such as the bank, to resolve any issues and take the appropriate actions to sell the company’s assets. The liquidator will also collect any outstanding debts, handle all employee claims and issue the necessary reports to government agencies. This process is continued until the company has ultimately liquidated.

How are companies affected by liquidation?

In simple terms, the company will cease to exist after creditors’ voluntary liquidation. During the process, the liquidator is required to investigate any actions taken by the directors during the time the business was insolvent. If it is found that they failed to fulfil their duties whilst trading insolvently, they may be found guilty of wrongful trading. In terms of employment, if there is no company then there is effectively no job, so all the employees will be terminated. However, it is entirely possible that the liquidator may take control of the business and retain employees from the period of trading.

A Members’ Voluntary Liquidation (MVL)

A Members’ Voluntary Liquidation (MVL) is a solvent Liquidation, meaning a company is able to pay its debts in full, together with interest. This procedure is usually used when the shareholders of a company wish to retire, realise their investment or where the company is surplus to requirements. To undertake a Members Voluntary Liquidation, a company must not be insolvent.

Compulsory Liquidation

Compulsory Liquidation is often referred to as a ‘winding-up by the court’. This court-based procedure is the ultimate sanction against a business that defaults on basic obligations to creditors. The compulsory liquidation is ordered by the court, typically following the petition of a creditor, the business or a shareholder.

What does Compulsory Liquidation involve?

A creditor must present a petition to the Court, requesting that the court orders the company to enter into compulsory liquidation. Creditors as banks or lenders may choose this route in order to recover outstanding funds that are owed to them. For the application to be approved, the creditor must be able to prove that the business has been unable to make repayments and that the best course of action is to ‘wind-up’ the company. If they are successful, a liquidator will be appointed to value, market and sell the company’s assets. Once it has been approved, the only thing the business owner or director can do is seek the guidance of an insolvency practitioner to mitigate the potential negative outcomes of the liquidation.

The Outcome of Compulsory Liquidation

The result of compulsory liquidation is the complete dissolution of the company and the automatic dismissal of all the employees. As with CVL, the powers of the directors of a liquidated company cease and the directors are not personally liable for the debts.