Liquidation is simply the legal process of closing down a business and liquidating (selling) its assets. There are two main reasons why a business might go into liquidation. Sometimes owners and shareholders decide it's time to end the business for natural reasons (e.g. they want to move to new ventures, owners want to retire etc.), and sometimes businesses are forced into liquidation because they're so badly in debt.
If you think your business is coming to an end - whether naturally or due to financial problems, then you are advised to seek advice either from an authorised insolvency practitioner, your local Citizens Advice Bureau, a financial adviser, a debt advice centre, or a qualified accountant.
There are three different types of liquidation. The option your business takes will depend on why your business needs to close down in the first place.
- members' voluntary liquidation (MVL)
- creditors' voluntary liquidation
- compulsory liquidation.
Members' voluntary liquidation (MVL)
In short - a method of securely closing down a business that has no debts.
Only solvent businesses can opt for a members' voluntary liquidation (MVL). A solvent business is one that has enough capital - whether in the form of cash or assets - to pay all liabilities, as well as any statutory interest and the liquidation administration costs. In order to go ahead with MVL, business owners must declare they are solvent in the presence of a solicitor. They must swear the business can afford to pay the required amount of money within the next 12 months.
MVL is a good option in the following situations:
- A family business needs winding up because the children don't want to take on the responsibility of running the business after their parents have retired.
- Shareholders who have money tied up in a business want to retire and release their money from the company for their own personal use.
- When a business is part of a group of companies, directors and shareholders might decide to liquidate it so they can transfer the capital into one of the other businesses in the same group.
Creditors' voluntary liquidation
In short - a method of securely closing down a business because it is in debt and can no longer afford to run.
Creditors voluntary liquidation is initiated by the company's directors when the company runs out of money and stops being viable. Directors must tell the shareholders, who must then call a meeting with a licensed insolvency practitioner as soon as possible.
Creditors voluntary liquidation is appropriate when:
- the company can't pay its debts
- the business is no longer viable, even after a restructuring work
- no one wants to buy the products or services
- the directors don't feel motivated to turn the company around.
In short - a way for creditors to wind up a business that owes them money.
Compulsory liquidation is started by a creditor who has not been paid (usually for supplies or services). The creditors must present a petition to the court declaring their wish to wind the company up. If the court agrees then a hearing will be held 40-60 days later.
Compulsory liquidation happens when:
- creditors are owed £750 or more
- creditors have been trying to get their money back for a while with no avail
- all other methods of debt collection have failed.
What is a liquidator?
During the meeting with your insolvency practitioner, a person known as a liquidator will be appointed to:
- fill out the forms
- call meetings
- investigate directors' conduct
- collect assets and convert them to cash
- work out debts and share them between creditors.
What happens after liquidation?
Businesses will be dissolved three months after liquidation is concluded. Naturally, directors worry what effect liquidating their company will have on them personally. Will they ever be able to run a business again? Will they ever be able to take out a loan, or get a mortgage?
As long as your company is limited liability and there was no wrongful trading (i.e. you fail to act reasonably and on time, or neglect your accounts and continue taking credit in the knowledge that the company can't afford it), you will not be at any personal risk. However, if you continue to trade when insolvent then directors might be made personally liable for the company's debts. This is known as the 'lifting of the veil of incorporation' - a phrase describing the lifting of protection directors usually have in a limited company.
If you are a sole trader or a partnership then your personal assets could be at risk if your business becomes insolvent and you may be required to pay outstanding debts from your own pocket.
You are advised to get professional help as soon as you think your company is about to become insolvent.
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