A Liquidation occurs when a limited Company ceases to trade and its assets are realised to pay its creditors with any surplus being paid to its shareholders. There are three types of Liquidation:
1. Members Voluntary Liquidation (MVL)
This is where the Company is able to pay all its debts and there is going to be a return to shareholders on their capital. The shareholders pass a Resolution to wind up the Company and appoint a Liquidator.
2. Creditors Voluntary Liquidation (CVL)
This is where the Company is unable to pay all its debts in full. The shareholders pass the Resolution to wind up the Company and appoint a Liquidator. However, there then has to be a meeting of creditors so that the creditors can receive information about the Company’s affairs and the reasons for its insolvency. Creditors also vote on the appointment of a Liquidator and are able to change who is Liquidator if they so wish.
3. Compulsory Liquidation
This is where an application, or Petition, is made to the Court for a Company to be wound up. This is usually done by a creditor who has not been paid but can be instigated by various Crown authorities where there is serious concerns about how the Company is operating. In the first instance the Official Receiver becomes Liquidator of the Company although he may convene a meeting of creditors for them to appoint someone of their choosing.
Is a Company Liquidation right for my Business?
How do you know which type of Liquidation is the most appropriate for your business? Your Company is insolvent if it cannot pay its debts as and when they fall due (“the commercial test”). A Company is also insolvent if the Company’s balance sheet shows that its liabilities exceeds its assets (“the balance sheet test”). If either of these tests apply then the type of Company Liquidation you would need to be considering is a Creditors’ Voluntary Liquidation.
We are regularly approached by Company Directors who have been advised by their Company’s accountants that they need to enter a Members’ Voluntary Liquidation. An MVL is a procedure were there are surplus assets available to the Company’s shareholders (or members) after all of the Company’s creditors have been paid in full.
A common factor with both types of Company Liquidation is that only a Licensed Insolvency Practitioner can act as Liquidator.
If you require advice on any type of Liquidation, please contact us on 0800 012 6649.
Voluntary Liquidation is the process by which the Directors of a Company convene a meeting of shareholders/members to put the Company into Liquidation. This is to be contrasted with a Compulsory Liquidation which is a method by which a creditor issues a Petition through the Court to have the Company wound up.
In a Voluntary Liquidation, if the Company ultimately has sufficient assets to be able to pay all of its creditors in full (together with all costs), it will be a solvent Liquidation, or Members’ Voluntary Liquidation(MVL). If, however, the Company has insufficient assets to pay all of its creditors in full it will be an insolvent Liquidation or Creditors’ Voluntary Liquidation (CVL). Creditors Voluntary Liquidation is the most common form of Voluntary Liquidation.
In order to put a Company into Creditors’ Voluntary Liquidation a meeting of the Company’s Directors is held to instruct a Licensed Insolvency Practitioner to assist them to convene meetings of the Company’s members/shareholders and creditors.
The members meeting is held first and it is at this meeting that the Resolutions putting the Company into Creditors’ Voluntary Liquidation and appointing a Licensed Insolvency Practitioner as Liquidator are passed. Immediately after that meeting, the meeting of the Company’s creditors is held. This gives creditors the opportunity to question the Directors as to the reasons for the failure of the Company and to put forward any alternate Liquidator.
Once appointed the Liquidator takes control of the Company and its assets.
Members Voluntary Liquidation
What is Members Voluntary Liquidation?
This a the way a limited Company is wound up after it has come to the end of its useful life and its assets need to be distributed to its shareholders. The key point is that the Company must have paid, or be able to pay, all of its creditors with there then being a surplus of assets that can be returned to shareholders. A Licensed Insolvency Practitioner is appointed as the Liquidator of the Company and his duty is to realise the assets of the Company, pay off the creditors and return the surplus to shareholders.
The Company is placed into Members’ Voluntary Liquidation at a meeting of shareholders/members where a Resolution is passed. It is very similar to the process of a Creditors’ Voluntary Liquidation, but as the creditors will, or have already been paid in full, there is no need to hold a creditors meeting.
When is Members Voluntary Liquidation Appropriate?
The Company will have ceased to trade and there will be a surplus of assets over liabilities and the shareholders will want a return of their capital. A return on capital is often taxed at more favourable rates than if the assets are taken out of the Company by way of dividend.
Company Law stipulates that it is only a through a Liquidation that shareholders can receive a capital distribution. However, if the expected surplus is below £25,000 then it may be possible for the Company to avoid Liquidation and also the associated costs. This is because, with HM Revenue & Customs agreement, the assets can be paid out as capital, rather than income, and the Company struck off the register at Companies House. However, if the surplus is above £25,000 then HM Revenue & Customs will not give such a concession and the capital distribution to shareholders will have to be completed by a Liquidator.
What is the best timing for a Members Voluntary Liquidation?
This is entirely dependent on the circumstances surrounding each liquidation. Lines Henry work with the Directors, shareholders, and the accountants to ensure that the process of Liquidation is done as efficiently as possible. We aim to keep costs to a minimum. With proper planning, all the interested parties should know what is going to happen, when it is going to happen, and the likely costs before the Company is put into Liquidation.
For further information call Lines Henry on 0800 012 6649 for a free consultation.
Creditors Voluntary Liquidation
What is Creditors Voluntary Liquidation?
This is the most common route for dealing with an insolvent Company. In a Creditors’ Voluntary Liquidation, the Directors decide to put the Company into Liquidation because it cannot pay its debts. The Directors will call a meeting of shareholders, at which the Resolutions to voluntary wind up the Company and appoint a Liquidator are passed. A Licensed Insolvency Practitioner is appointed as the Liquidator of the Company whose prime duty is to collect in the assets of the Company, sell them and distribute the proceeds to the Company’s creditors.
When is Creditors Voluntary Liquidation Appropriate?
With Creditors’ Voluntary Liquidation the Company will cease to trade, any employees will be dismissed and assets will be realised. Where it may be possible to trade out of the situation, other insolvency procedures such as Administration or a Company Voluntary Arrangement may be more appropriate. It is for this reason that Directors should seek advice from a Licensed Insolvency Practitioner who can guide them through the options. Creditors’ Voluntary Liquidation will be appropriate where:
- The Company is insolvent (cannot pay its debts as and when they fall due);
- The Company’s business is no longer viable;
- The Directors are not prepared to continue to trade the Company;
What is “Phoenixing”?
This is the practice whereby the Directors buy back the assets of an insolvent Company from its Liquidator. This is a common practice where, for instance, the Directors have the option of putting limited resources into an already insolvent Company. In doing this, they may merely reduce the deficiency to the Company’s creditors. Alternatively they could use the same funds to set up a new Company and acquire the assets of the old Company. This is known as Phoenixing. There are strict procedures to be followed on valuation and disclosure of such a deal to the creditors. The Liquidator will ensure that the best price is obtained for the assets.
The Process of Creditors Voluntary Liquidation
A Board meeting needs to be held to instruct a Licensed Insolvency Practitioner to advise the Directors and to assist in convening meetings of the Company’s members and its creditors. The meeting of members and creditors are usually held on the same day at a venue convenient for the majority of creditors. Those meetings will be held on a business day between the hours of 10.00 a.m. and 4.00 p.m. Notice of the meetings is advertised in the London Gazette for Companies registered in England and Wales, the Edinburgh Gazette for Companies registered in Scotland and the Belfast Gazette for Companies registered in Northern Ireland. There is no longer an absolute requirement to advertise the meetings in the local press for Companies registered in England and Wales although this may be required in circumstances where there is doubt about who the creditors of the Company are. For Companies registered in Scotland and Northern Ireland, the Licensed Insolvency Practitioner has no discretion on local advertising, which means advertisements will also be placed in local newspapers.
The Directors need to assist the appointed Insolvency Practitioner to prepare a detailed trading history of the Company, together with providing financial information as to its affairs. This report will be presented as a Director’s report to the meeting of creditors.
For further information call Lines Henry on 0800 012 6649 for a free consultation.