What is Liquidation and What Does it Mean For My Company?

Corporate insolvency is a complex and difficult process for any business to go through. There are many forms which the corporate insolvency process can take, from liquidation, to administration, to company voluntary arrangements. Understanding these processes, while no equivalent for having expert guidance, can help to begin to ease the difficulty in dealing with insolvency.

This note sets out some general information on one of the main forms corporate insolvency can take - liquidation. For more information, get in touch with our team today.

What is liquidation?

So, what is liquidation? Liquidation is the process of ‘winding-up’ a company which is insolvent. It is distinct from other forms of insolvency processes, such as administration, as it always leads to the company coming to an end. However, this does not mean that the processes are completely separate as it is possible, for example, for a company to begin in administration and end in liquidation.

During the liquidation process, a company’s assets are gathered by a person called a liquidator and sold so that the debts of the company can be settled as best as possible before the company is closed down.

What does this mean for my company?

In practice, entering into the process of liquidation will have a number of consequences for your company.

Firstly, a liquidator will take over the operations of the company and deal with the company’s affairs during the winding-up process as opposed to this being done by the directors/ owners/ shareholders of the company.

The liquidator will also settle all of your company’s affairs. This could include:

settling outstanding legal disputes,
collecting any debts owed to the company,
terminating employment contracts,
ending other contracts such as supplier or distributor contracts
selling off company assets, and
settling debts owed by the company to creditors to the fullest extent possible.

After all of the company’s affairs have been settled, the liquidator will have your company removed from the register of companies held at Companies House, effectively ending the life of your company.

Voluntary vs compulsory liquidation

Although all of the above does not sound like something an owner/ shareholder or director may want for their company, it is not always the case that liquidation is forced on a company. Broadly speaking, there are two types of liquidation - voluntary liquidation and compulsory liquidation.

Voluntary liquidation

The members of a company (i.e. the shareholders) can decide to liquidate the company if they do not wish to run it anymore (whether for financial or personal reasons). There are two types of voluntary liquidation:

Members’ voluntary liquidation (MVL) and
Creditors’ voluntary liquidation (CVL).

Despite the name difference, both MVL and CVL are initiated by the company's shareholders. The main difference between MVL and CVL is that in MVL, the company is solvent (i.e. it can pay its debts/ its assets are greater than its liabilities), and the director(s) of the company can make a declaration to that effect. In CVL, the company is not solvent or, at least, the directors are unwilling to declare that the company is solvent.

In either case, a liquidator is appointed, and the company's affairs are wound up. If the company is not solvent and, thus, enters into CVL, then the creditors of the company will have the opportunity to appoint the liquidator rather than the shareholders (as is the case under MVL).

Compulsory liquidation

Compulsory liquidation is not initiated by the company's shareholders but rather by a court order.

An application for liquidation (known as a winding-up petition) is presented to the court by someone listed under section 124 of the Insolvency Act 1986, namely either:

the company itself,
the company’s director(s),
creditors of the company, or
a number of other bodies such as the Financial Conduct Authority.

In most circumstances, it will be a creditor of the company who applies to the court or this type of liquidation.

If the court grants the petition, a liquidator will be appointed, and the company’s affairs will end as described above.

Powers of a liquidator

As can be seen from the above discussion, a liquidator is appointed during any liquidation process, whether compulsory or voluntary. Therefore, it is worth briefly outlining exactly what a liquidator can do.

The Insolvency Act 1986 gives liquidators a wide array of powers to help them deal with the company’s affairs. On appointment, they are given the powers which until that point resided with the director(s) of the company - although it is possible in voluntary liquidation for the director(s) to be allowed to retain some of their powers.

Some of the main powers a liquidator has include:

dealing with any legal actions the company is involved in,
the ability to carry on business as far as needed to wind up the company,
to sell the assets of the company, and
to pay creditors.

As you will see, these powers generally relate to the liquidator's role to conclude the company and pay creditors of the business as fully as possible.

Contact our Insolvency Solicitors in Central London today

Deciding to enter into liquidation or dealing with a winding-up petition can be stressful and complex. Our insolvency solicitors at Lewis Nedas Law are able to guide you through this process and help you make the best decision for your business.