Liquidation

Where the core business of an insolvent company cannot be preserved, a company is likely to be placed in liquidation and its assets sold off. The proceeds of the sale are distributed to the company's creditors. Liquidation is almost always the end of the road for a company, and its name will eventually be removed from the companies register.

The liquidation of an insolvent company instigated by the directors is known as a Creditors Voluntary Liquidation (CVL), and not by the creditors, as the name implies. Alternatively, the creditor's right of action is through the winding up petition presented to the Court; this is known as a Compulsory Liquidation

Compulsory liquidation

A Compulsory Liquidation is ordered by the court, following a petition by creditors, the company itself, or a shareholder.

The case is first referred to the official receiver (a civil servant and officer of the court), who decides whether the assets of the company are likely to cover administrative costs. If they are, the official receiver will call a creditor's meeting to appoint a liquidator; if not, the case will be handled by the official receiver. In a Compulsory Liquidation, the conduct of the company's directors will be investigated as part of the procedure, by the official receiver.

One of the most common grounds for a company being wound up by the court (and therefore entering Compulsory Liquidation) is that it is unable to pay its debts.

Once the Order has been made by the court, the official receiver has a duty to investigate the causes of the business failure and the promotion, formation, business dealings and affairs of the company.

During these investigations the official receiver will:

• carry out an inspection of the company's premises, if necessary;
• take custody of any books and records;
• call all the directors for an interview.

Creditors' voluntary liquidation (CVL)

A CVL is a liquidation begun by the directors and then ratified by the shareholders, whilst the creditors confirm the appointment of the liquidator.

The CVL is the most dignified and preferred way for the directors of a company to deal with the insolvency. The law prohibits wrongful trading when a company is insolvent, and directors could risk being found personally liable if they do not take action at an early stage. Directors should consult a licensed insolvency practitioner for advice on their position.

Once a meeting of creditors has been held to confirm the appointment of the insolvency practitioner as the liquidator of the company, the directors will be required to cooperate with all reasonable requests made by the liquidator.

A liquidation committee may be established if there are enough creditors who wish to form one.

Members Voluntary Liquidations (MVL)

A company that is solvent (i.e. its assets are greater than its liabilities) can resolve to enter into an MVL in order to wind up the affairs of the company. A meeting of the board of directors should be held to propose an MVL and this should then be followed by a General Meeting to pass such a resolution.

Unlike in a CVL, the directors of a company entering into an MVL must swear a declaration of solvency to confirm that the company can pay all outstanding debts within 12 months of the MVL commencing.

As the company is solvent, there will be no investigation by the liquidator into the business and affairs of the company, unless it is found that the company is insolvent. The liquidator will then place the company into CVL and investigate accordingly.