Question

Briefly discuss the following topics: STEPS IN THE LIQUIDATION PROCESS

Answer 1

Liquidating a company refers to the procedure in which a limited company is brought to a close by an appointed Insolvency Practitioner (Liquidator).

The company’s assets are then sold (liquidated) and any realisation of revenue is redistributed in order of priority.

The company is struck-off the registrar of companies and this is known as dissolution, which is the final stage of the liquidation process.

There are two voluntary liquidation procedures and one compulsory procedure.

The voluntary procedures, Creditors Voluntary Liquidation and Members Voluntary Liquidation are initiated by the shareholders and directors.

The compulsory procedure is usually initiated by creditors.

A Creditors Voluntary Liquidation (CVL) used by insolvent companies and is initiated by a shareholders’ resolution. It involves the dissolution of the insolvent company and the redistribution of the company’s assets to the creditors. This procedure enables directors to write off unsecured limited company debts that are not personally guaranteed.

Directors may see voluntary liquidation as a welcome and safe exit from a stressful situation; whilst addressing all of the creditors, appropriately.

If the limited company has liabilities that it cannot afford to pay and you would like to move on without the stress of the company’s debts hanging over your head, this type of business liquidation may be an appropriate option.

A Member’s Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent company and can be used as part of an exit strategy.

An MVL may be considered if you have a solvent company that you want to close as part of your business plan and reduce taxation. Your company may have outlived its purpose and be heading towards a natural end of trading, or you may wish to extract the value of cash and assets from the company in a tax efficient manner.

For an MVL, the directors must sign a declaration stating that there are no remaining creditors.

Compulsory Liquidations are usually initiated by a creditor that is looking to force a company into closure via a court order application. The process is usually instigated with a winding up petition and once it is heard at court, it can become a winding up order.

This procedure is often used to wind up your business as a last resort by disgruntled creditors after failed negotiations over missed payments. This insolvency procedure is usually handled by the Official Receiver, or an appointed Insolvency Practitioner. Therefore, this is not a voluntary process for directors.

The basic steps for liquidation for voluntary liquidation are as follows:

1. An Insolvency Practitioner is appointed as Liquidator.
2. The company’s assets are then assessed and realised (liquidated).
3. If there are any creditors they are then paid in order of priority.
4. Surplus cash is distributed to the shareholders.
5. The company is finally dissolved and struck-off the registrar of companies (Companies House).