Liquidation is the name of the insolvency process used to legally wind up a company. In liquidation a legally appointed liquidator will realise the company’s assets in order to pay off all of the company’s creditors.
The most common form of liquidation is when a company has become insolvent and incapable of paying its debts as they fall due, however a company may enter liquidation even when it has surplus assets at the behest of the company’s owners.
The three main ways a company can be put into liquidation are outlined below.
A Creditors Voluntary Liquidation (CVL) is the most common type of company liquidation. In a CVL the company’s directors would decide to put the company into liquidation due to the company being insolvent. For a company to enter a CVL, usually for the company’s board of directors to call a board meeting and decide by a majority vote of its members that the company should be put into liquidation.
Calling the Creditors Meeting
Once it is decided that the company should be liquidated a Creditors meeting should then be called giving at least 10 days notice to all of the creditors, and the meeting should also be advertised in at least 2 daily newspapers where the registered office or principal place of business is situated, again at least 10 days before the meeting.
Creditors Meeting & Statement of Affairs
At the creditors meeting the reasons why the company is to be liquidated will be read out and then a Statement of Affairs will be presented to the creditors.
The Statement of Affairs shows the book value of the company’s assets together with an estimated amount of their realisable value. It will also contain a list of the creditors and the amount of each of their claims. The creditors meeting will also provide the creditors with an opportunity to appoint their choice of liquidator and appoint members of a committee of inspection.
Members Voluntary Liquidation (MVL) is the name of the process for liquidating companies that are solvent but winding up their business because they have come to an end or ran their course, or because the directors have decided to retire. In this type of liquidation all creditors are paid in full and the surplus is returned to the shareholders.
Why use a Members Voluntary Liquidation?
A MVL is the most tax efficient way for the shareholders to release any monies in the company. The reason for this is if the money is released under a MVL then the funds are taxed at 25%, whereas if the money was taken out as salaries it would be taxed at a much higher rate.
Statutory Declaration of Solvency
In order for a company to be placed in a Members Voluntary Liquidation, the directors of the company have to swear a Statutory Declaration of Solvency, which summarises all the company’s assets and liabilities and states that the company must pay all its debts in full within 12 months from the date the liquidation commences. There can be serious consequences if they swear a declaration which has inaccuracies. If it is found that the company is in fact insolvent then the liquidation will be converted to an insolvent Creditors Voluntary Liquidation.
When the declaration is sworn a copy must be sent to each of the shareholders along with a notice of a shareholders meeting. The shareholders will then hold a meeting and 75% of the shareholders must vote in favour of the resolution and also appoint a liquidator for the purpose of winding up the company. Once the Liquidator is appointed it is their role to settle any outstanding creditors before distributing the remaining monies to the shareholders.
A Members Voluntary Liquidation formally ends the life of the company after all creditors have been paid in full and all other matters are resolved.
A Court Liquidation also known as a compulsory liquidation is when a petition is made to court to appoint a liquidator, to ‘force’ the company into liquidation. The petition is usually made by creditors that are seeking payment of money they are owed. The petition can also be made by the company itself, its shareholders (for various reasons usually because they are unhappy), or Directors, however in practice the majority of court liquidations are petitioned by creditors.
The court may appoint a provisional liquidator to safeguard the company’s assets for the creditors if they feel they are at risk of being squandered or wasted, while they wait to appoint an official liquidator.
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