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What is Liquidation?

If your company no longer has sufficient cash to trade and isn’t viable, liquidation is an effective way to close the company and sell its assets.

There are several types of company liquidation. Companies can be liquated by their creditors due to non-payment of debts and insolvency or wound up voluntarily by their directors.

Liquidation is typically used to close a company when it’s no longer viable and the directors are uninterested in continuing. In some cases, liquidation is used to close and wind up a company that’s profitable and solvent in order to extract cash.

Creditors can also use liquidation to force a company that’s unable to pay its debts to cease trading. In compulsory liquidation, a company is closed and its assets sold to raise funds and compensate its creditors.

Are you considering liquidating your company? Whether you want to liquidate your company to bring an end to creditor pressure or to extract cash as capital gains, the liquidation process can be quite complicated.

Read on to learn more about the three types of liquidation, how the process works, the ways creditors can liquidate your company in response to insolvency and other important information related to the liquidation process.


Quick facts about liquidation

  • Liquidation is a legal process that results in the closure of your company and the sale of its assets to raise funds for creditors or, in the case of a company that’s solvent, its shareholders.
  • There are three types of company liquidation relevant to UK businesses: compulsory liquidation, Creditors Voluntary Liquidation and Members Voluntary Liquidation.
  • Creditors can wind up your company through compulsory liquidation if your company fails to pay its debts of £750 or greater after receiving a statutory demand and doesn’t respond once a winding up petition is issued.
  • If you have broken the law, such as by trading after realising your company is insolvent, you could face charges of wrongful trading if the investigation into your company’s conduct reveals wrongdoing.
  • Since liquidation results in the closure of your company, it’s a suitable option for companies that are insolvent and incapable of financial recovery due to excessive debts or poor cash flow.


Three types of company liquidation

Although the term “liquidation” is usually associated with compulsory liquidation, there are actually three different types of liquidation that are relevant to UK-based companies.

These include compulsory liquidation, which can be initiated by a creditor after a company doesn’t respond to statutory payment demand within 21 days, Members Voluntary Liquidation and Creditors Voluntary Liquidation.


Compulsory Liquidation

If your company owes money to its creditors and doesn’t make its payments as they become due, it could be served with a statutory demand. This is a legal demand for payment that requires your company to pay its debt within 21 days of receipt.

Learn more about statutory demands


When your company doesn’t pay its debt after receiving a statutory demand from a creditor, the creditor can petition the court to “wind up” your company through the compulsory liquidation process.

If the creditor is successful in receiving a winding up petition, your company has a limited amount of time in which it can respond – typically by entering into a CVA or administration – to protect itself from legal action.

Learn more about winding up petitions


In order to receive a winding up petition, a creditor needs to be owed at least £750 by your company. The process of filing for a winding up petition is quite expensive for creditors and is a serious legal step for a creditor to take.

Winding up petitions are publicised in The Gazette. It’s extremely likely that your company’s bank accounts will be frozen after a winding up petition is filed, making it extremely difficult to continue trading.

If the creditor can demonstrate to the court that your company has failed to live up to its agreement and pay its debts, and that liquidation is the best solution for your company’s creditors, your company will be liquidated by the court.

During compulsory liquidation, a receiver is appointed to value and sell the assets owned by your company. The proceeds realised from the sale of assets are used to pay your company’s creditors.

As part of the compulsory liquidation process, an investigation is held into your company’s conduct while insolvent. If you have acted improperly, you could be found guilty of wrongful trading and face personal liability for company debts.

Learn more about compulsory liquidation


Creditors Voluntary Liquidation

Creditors Voluntary Liquidation, also referred to as a CVL, is a type of liquidation that’s entered into voluntarily by company directors. The outcome of a CVL is the closure of the company and the liquidation of its assets in order to pay creditors.

Although the outcome of a CVL is very similar to that of compulsory liquidation, there are several differences between the two types of company liquidation that make them very different procedures.

In a CVL, your company’s directors voluntarily appoint an insolvency practitioner upon realising the company is insolvent. All viable options for recovery, including administration and a CVA, are considered before liquidation is chosen.

Once liquidation is chosen as the ideal solution for the company, a meeting is held with the company’s creditors and a liquidator is appointed to manage the sale of company assets and the closure of the company.

Like compulsory liquidation, the voluntary liquidation process also involves an investigation into director conduct during insolvency. If directors have acted in violation of the law, they could face wrongful trading charges.

However, since the CVL process is typically initiated by directors after discovering that the company is insolvent, the risk of company directors facing charges due to wrongful conduct is significantly lower than in a compulsory liquidation case.

Learn more about Creditors Voluntary Liquidation


Members Voluntary Liquidation

Members Voluntary Liquidation, also referred to as an MVL, is a type of voluntary liquidation in which a company’s shareholders vote to sell the company’s assets in order to extract value from the company.

An MVL differs from a CVL in that it’s only an option for companies that are solvent and free of significant financial liabilities. Companies that enter into an MVL need to be able to prove they are solvent and capable of paying all debts within 12 months.

There are several reasons for shareholders to close a company through an MVL. A major advantage of using an MVL to realise company value is that earnings from a liquidation sale are capital gains, and thus not subject to Income Tax.

Like other forms of liquidation, Members Voluntary Liquidation is a public process that’s published in The Gazette. However, due to the voluntary nature of an MVL it has no negative impact on your company’s trading history.

Learn more about Members Voluntary Liquidation


How can a creditor liquidate your company?

If your company ignores communications from its creditors and doesn’t make any effort to pay its debts, it could be wound up through compulsory liquidation due to one of its creditors taking action.

Creditors can liquidate a company using a winding up petition. If your company has ignored a statutory demand from a creditor for a debt of £750 or more, a winding up petition can be issued after three weeks, allowing the creditor to petition the court.

Receiving a winding up petition is an extremely serious development that you need to respond to. By acting quickly and entering into administration, proposing a CVA, or negotiating with the creditor directly, you may be able to avoid liquidation.

Learn more about winding up petitions

Learn more about Company Voluntary Arrangement

Learn more about administration


What are the advantages of liquidation?

Although liquidation is often viewed as a negative outcome for a company, there are some situations in which liquidation is the most effective way to end a company and create liquidity for its creditors. Some of the advantages of liquidation include:

  • Creditors are able to receive some cash from your business through the sale of its assets.
  • Your company closes and is struck from the company’s registrar, ending the stress of dealing with a struggling or insolvent company as a director.
  • If your company’s directors have complied with the Insolvency Act 1986, the likelihood of facing wrongful or fraudulent trading charges is relatively low.
  • In most cases, liquidation is a faster and simpler option than proposing a CVA to creditors, entering into administration or attempting to raise funds.
  • In an MVL, your company’s shareholders are able to sell the company’s assets and generate cash without facing a significant Income Tax burden.


What are the disadvantages of liquidation?

Liquidation, whether voluntary or compulsory, is a serious procedure that also has several disadvantages, particularly for your company’s directors and creditors. The disadvantages of liquidation include:

  • Creditors may only recover a small percentage of the total amount they are owed by your company through the sale of its assets.
  • If you have violated the Insolvency Act 1986 by trading after realising that your company is insolvent, you could face charges of wrongful trading and personal liability for company debts.
  • If your company enters into an MVL but isn’t financially solvent, you could face fraudulent trading charges if an investigation indicates you knew that the company was insolvent prior to liquidation.
  • The public nature of liquidation means that your reputation could suffer, particularly if your company is forced into compulsory liquidation via a winding up petition from a creditor.


What is wrongful trading?

If you act improperly after realising that your company is insolvent, you could face charges of wrongful trading. Wrongful trading is a civil wrong under the Insolvency Act 1986 designed to prevent improper trading after a company becomes insolvent.

You could face wrongful trading charges if you knew there was no realistic prospect of your company avoiding insolvency and failed to take action to minimise the losses of creditors after becoming insolvent.

Wrongful trading charges can be applied to both a company’s formal directors and de facto directors. This makes it important for all individuals involved in the major decision making at your company to have reasonable awareness of its finances.

If a court finds that you have acted wrongly as director of a company, you could face personal liability for some of your company’s debts. In some cases, this liability may cover a significant amount of your company’s total debts to its creditors.

The most consistently effective way to avoid being charged with wrongful trading is to swiftly and effectively act to ensure the interests of your company’s creditors are prioritised after learning that your company is insolvent.


Does your company need expert help?

Are you concerned about a creditor winding up your company? If your company has significant debts that it cannot realistically repay due to cash flow issues, it could be forced into compulsory liquidation by a disgruntled creditor.

If your company has serious financial issues that seem impossible to solve, entering into liquidation is an effective way to create liquidity for creditors and end the legal pressure you’re facing as company director.

In the event that your company is solvent and you’d like to liquidate its assets and close the business, a Members Voluntary Liquidation is an effective way to reduce your Income Tax liabilities while closing your company.

We can provide expert help and assistance to ensure you make the correct decision regarding your company’s future, whether you’re under pressure from creditors or simply believe it’s time to close your company.

Contact us to speak to an insolvency expert and learn more about the liquidation process. We can review your company’s financial situation and provide the advice and assistance you need to make an informed decision about its future.


Learn more about liquidation