Liquidation
Written by Nicholas Barnett, Director of Libertas Associates
There are three different types of liquidation process, two of which are utilised for insolvent companies (Creditors’ Voluntary Liquidations and Compulsory Liquidations) and the other for solvent companies (Members’ Voluntary Liquidations).
A brief outline of these procedures is detailed below:
Creditors’ Voluntary Liquidation (often referred to as a “CVL”)
A Creditors’ Voluntary Liquidation may be suitable for a Company that is in financial distress and/or insolvent. A Company is deemed to be insolvent if it is unable to pay its debts as and when they fall due and/or its liabilities exceed its assets. This form of liquidation is initiated by the Director(s) of the Company, following consultation with an Insolvency Practitioner.
To place a Company into Creditors’ Voluntary Liquidation, the Director(s) will instruct the Insolvency Practitioner to convene meetings of both the Company’s Shareholders and its Creditors. Shareholders must firstly resolve to place the Company into Liquidation and appoint an Insolvency Practitioner to act as Liquidator. At the Meeting of Creditors, which in practice is normally held shortly after the Shareholders Meeting, Creditors will be provided with a Statement of the Company’s Affairs detailing its assets and liabilities and a Report providing other financial and relevant information. Creditors’ then have the opportunity to ratify the appointment of the Liquidator or appoint an alternative Insolvency Practitioner and consider various other resolutions, such as the remuneration of the Liquidator and whether to establish a Creditors’ Committee (to assist the Liquidator in his functions).
Once the Company is in Creditors’ Voluntary Liquidation, the main function of the appointed Liquidator is to maximise the realisation of the Company’s assets and make funds available (where possible) for distribution to creditors.
Compulsory Liquidation
A Compulsory Liquidation is a Court driven process which follows the presentation of a winding up petition (normally presented by a Creditor after a Company has failed to pay money due on Judgement or following presentation of a Statutory Demand). The implications on a Company and its Director(s) following presentation of a winding up petition are complex and far fetching and if not managed correctly, could lead to aspects of personal liability. On receipt of a winding up petition (if prior advice has not already been obtained) it is essential that Director(s) seek the advice of an Insolvency Practitioner. Following the presentation of the petition, the Court will (if it deems fit) make an order for the winding up of the Company but will want to be satisfied that the Company is insolvent. A Company is deemed to be insolvent if it is unable to pay its debts as and when they fall due and/or its liabilities exceed its assets.
Whilst the petitioner is normally a creditor it can also be the Company itself, its Directors, a Contributory or Contributories, the Secretary of State, the Official Receiver, Administrative Receiver, Administrator or Supervisor of a Company Voluntary Arrangement.
Once a Winding Up Order has been made, the Company’s affairs will, in the first instance, be dealt with by the Official Receiver (a government organisation). Creditors can seek to have an Insolvency Practitioner appointed as Liquidator of the Company.
Members’ Voluntary Liquidation (often referred to as an ‘MVL’)
A Members’ Voluntary Liquidation is a solvent liquidation used to formally close down a Company. This procedure is only appropriate where a Company can pay all its liabilities within twelve months and is often used to distribute the Company’s assets to its shareholders in a timely and tax efficient manner.
In a Members’ Voluntary Liquidation, distributions made by a Liquidator to the shareholders are considered capital distributions as opposed to income distributions. Capital distributions are subject to Capital Gains Tax not Income Tax, and as a result, tax payable is often reduced after applying the various reliefs that are available.
To place a Company into Members’ Voluntary Liquidation, the Director(s) will instruct an Insolvency Practitioner to convene a Meeting of the Shareholders. Prior to that Meeting, the Director(s) will swear a Declaration of Solvency (prepared with the assistance of the Insolvency Practitioner) which sets out the Company’s assets and liabilities, together with a statement confirming that all liabilities can be paid within twelve months. Shareholders are then given the opportunity to resolve that the Company be placed into Liquidation. It is required that in excess of 75% (in value) of shareholders voting at the Meeting, vote in favour of the winding-up in order that the Company be placed into Members’ Voluntary Liquidation.
The information above, is a brief description of the Liquidation processes. For more information and to get specialist advice from a firm of Licensed Insolvency Practitioners, please do not hesitate to contact us or click on the following link for more information.
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