How Many Different Types of Liquidation Are There?
Liquidation results in a company ceasing operations, winding up its business and being struck from the Companies House register.
However, there are several different types of liquidation that a company can consider or be subjected to. The liquidation process begins when a company is facing financial difficulties or if a company wishes to wind up when there’s an opportunity to make a profit.
In this article, the team at Irwin Insolvency explains what the different types of liquidation are and which might be best for your company.
What Is Liquidation?
The end result of any liquidation process is the winding up of a business. Liquidation can be used to close down and terminate a company that’s facing financial difficulties, or it can be used on a voluntary basis to quickly close a business down while still solvent.
The liquidation process sees an insolvency practitioner appointed to oversee the winding-up process. This involves the company being closed down, its assets sold off, and staff made redundant.
Liquidation can be voluntary or involuntary, but either way the final step of all liquidation processes is to strike the company from the Companies House register. As part of the process, company directors may be investigated by the Insolvency Service.
Generally, directors have no personal liability in the event of liquidation, but if they are found to have acted fraudulently or broken the law, they may be disqualified.
What Are the Different Types of Liquidation?
There are three main types of liquidation that can occur in the United Kingdom. These are:
- Creditors’ voluntary liquidation (CVL)
- Members’ voluntary liquidation (MVL)
- Compulsory liquidation.
There are only certain scenarios when each of these types of liquidation can legally be undertaken, so let’s take a look at them in more detail to find out more.
Creditors’ Voluntary Liquidation (CVL)
Creditors’ voluntary liquidation (CVL) is a voluntary liquidation process commonly referred to as a ‘voluntary winding-up’ of a business. A CVL is instigated by the directors and shareholders of a business, and it’s a decision that’s taken when the company is insolvent and wishes to close down.
As a voluntary procedure, a CVL ensures that a business can be terminated in as smooth a manner as possible. In this respect, a CVL is only ever undertaken when other insolvency measures have failed, and the directors see no other way out other than to cease operations.
The liquidation process involves selling off any remaining company assets in order to pay outstanding debts. Once the company assets have been sold by the insolvency practitioner, the company is struck from the Companies House register.
Members’ Voluntary Liquidation (MVL)
A members’ voluntary liquidation (MVL) is, like a CVL, a voluntary liquidation process. However, the main difference between the two is that an MVL can only take place when a business is solvent.
An MVL is voluntarily entered into by the company directors and shareholders when they desire to wind up operations and potentially make a profit from doing so. Company directors may wish to retire, they may wish to free up capital for a new venture, or they might simply want to close business when profits are still strong.
An MVL is a quick and efficient way to wind up a business when it’s solvent. There’s no need for court orders, and the process simply requires the shareholders and directors to come to an agreement about the distribution of profits.
As with any other liquidation process, an MVL sees the company’s assets being sold off, outstanding creditors paid, and the company struck from the Companies House register.
Compulsory liquidation is very different from a CVL or an MVL, namely because this is an involuntary process. Compulsory liquidation occurs when creditors attempt to liquidate the company against the desire of the directors in order to recoup monies owed.
Compulsory liquidation can only occur once creditors have attempted and failed to secure the money they are owed in other ways. Compulsory liquidation is not an easy process to undertake, and creditors only generally pursue it as a last resort.
In order to forcibly liquidate a company, creditors must be owed a minimum of £750. This type of liquidation must be authorised by a court of law, and before it can begin creditors must issue the business a statutory payment demand. If this receives no response, then creditors will petition the courts to issue a winding-up order.
If the petition is authorised by the courts, then the directors will be removed from their position and lose control of the company. An insolvency practitioner will be appointed to oversee the impending liquidation, and assets will be sold off and the proceeds distributed amongst the creditors. The final act is to strike the company from the Companies House register.
In the event of compulsory liquidation, the directors are likely to be investigated by the Insolvency Service. Their conduct may be scrutinised and they may be disqualified if they are found to have acted illegally.
Which Type of Liquidation Is Best for My Company?
The three different types of liquidation can only be instigated under specific circumstances, so there’s often little choice for a company to make. An MVL, for example, can only be undertaken by a company that’s still solvent.
However, if a company has become insolvent and attempts to turn the business around have failed, then it’s generally advisable to opt for a CVL rather than waiting for creditors to forcibly liquidate the company. A CVL ensures that the directors have much more control over the liquidation process and that the winding up of the company can be achieved in as smooth a way as is possible.
Contact Irwin Insolvency for more information on Different Types of Liquidation
Irwin Insolvency has over 25 years’ experience providing expert advice to struggling businesses and companies.
Our expert team of insolvency practitioners has the experience and knowledge to help you through the liquidation process.
If you need to know more about the different types of liquidation, contact Irwin Insolvency today for more information.