Explaining the types of liquidation
With the UK economy in a constant state of flux, it’s normal for some companies to thrive while others struggle to survive. The process of liquidation is something that directors don’t consider until it happens to them and their business.
There are different types of liquidation in the UK. Understanding how they work, their key components, and what distinguishes them could be essential to protecting your business and ensuring you meet your legal requirements as a director.
Here at the Liquidation Centre, we are here to help you navigate the liquidation process should you face it.
What is liquidation?
Liquidation is a formal process for closing a company. This can happen voluntarily or be required by the court if the company is insolvent and a creditor applies for compulsory liquidation.
What is the liquidation process?
Once the decision has been made to wind down your business, a licensed insolvency practitioner is then appointed to sell any company assets and recover any debts.
In the case of an insolvent liquidation (i.e. one in which a company is unable to repay its debts), all net proceeds will be distributed between your company’s creditors.
For situations of a solvent liquidation, once creditors have been settled and any costs paid in full, any remaining funds can be equally shared between your company’s shareholders.
How long does it take to liquidate a company?
The time it takes to liquidate a company can range from a few months to 2 years or more.
This is dependent on factors such as:
- The type of liquidation
- The complexity of your company’s financial affairs,
- How forthcoming and transparent you are as a director in responding to the appointed liquidator’s requests.
What are the types of liquidation?
Broadly speaking, there are three main types of liquidation affecting companies in the UK.
These are:
- Creditors’ Voluntary Liquidation (CVL)
- Members’ Voluntary Liquidation (MVL)
- Compulsory Liquidation
Each one has its own processes and procedures, as well as specific circumstances under which it’s used.
For example, solvent companies are liquidated via an MVL, while insolvent corporations can be liquidated by either a CVL or a court-ordered compulsory liquidation.
Voluntary liquidation explained
As the name suggests, voluntary liquidation is a decision made by a company’s shareholders to close the business because they choose to, not because they’re forced to.
In the UK, there are two types of voluntary liquidation:
Creditors’ Voluntary Liquidation (CVL) explained
A Creditors’ Voluntary Liquidation (CVL) is the most common type of company liquidation in the UK.
Directors use it to close insolvent companies down in line with the Insolvency Act 1986. This is normally when the companies can no longer pay their debts or have become commercially unviable.
A CVL is a director-led process that typically occurs when a company’s financial position becomes untenable, and they’ve explored all other options to clear their debts. With shareholders’ support, a proactive decision is made to wind up the company.
Opting for a CVL demonstrates a desire to adhere to your legal responsibilities as a director by prioritising the interests of creditors and ensuring they don’t incur any unnecessary financial losses as a result of your company’s insolvency.
Engaging a licensed insolvency practitioner at this stage, such as those with the Liquidation Centre, can help mitigate risks and ensure compliance with legal requirements.
A liquidator is then appointed to take control of the business’s assets and distribute them accordingly to the creditors.
Members’ Voluntary Liquidation (MVL) explained
Members’ Voluntary Liquidation (MVL) allows a solvent company to wind down in an organised and orderly fashion. It’s typically suited for businesses with more than £25,000 to spread amongst shareholders.
The MVL process is usually carried out when an organisation has run its course or no longer serves its purpose.
This could be due to many reasons, including:
- Director/stakeholder retirement
- A desire to close down the business and leave the country
- Taking the profits to start a new business venture
- Realising company assets for tax purposes
- Responding to changes brought about by the IR35 rules
- Changing the nature of the business
One of the main benefits of an MVL is its tax efficiency: funds are extracted from the business and taxed as capital rather than income.
A director’s tax liability is further reduced if they’re eligible for Business Asset Disposal Relief (BADR). This decreases the rate of Capital Gains Tax up to a lifetime limit of £1 million.
In MVL, the directors make a statutory declaration of solvency, confirming that the business can pay off any debts, including interest, within the next 12 months.
A liquidator is then appointed to oversee the distribution of assets amongst shareholders.
What is the voluntary liquidation process?
When it comes to voluntary liquidation (whether it be CVL or MVL), several steps should be taken to help determine the best course of action for your business:
1. Initially, directors should speak with a qualified insolvency practitioner and discuss whether a CVL or an MVL is the most suitable solution.
2. If this is a CVL, a 75% majority of shareholders must agree for it to proceed. Also the company’s creditors are asked, within 14 days, to confirm the liquidator’s appointment.
3. An MVL is initiated when 75% or more of a company’s shareholders agree to a winding-up resolution and appoint a liquidator. Once in position, the responsibilities of a liquidator are virtually the same as for insolvent liquidations.
However, two differences exist:
1. No investigation will take place.
2. Once all creditors have been paid, any remaining funds are distributed to company shareholders.
The process for a CVL is simpler than an MVL, as it doesn’t require creditors to vote on the proposed appointment decision.
Once appointed, the CVL liquidator is charged with investigating the conduct of the company’s director(s), winding up any affairs in an orderly, efficient manner, and distributing any net asset proceeds to the creditors.
What are the director’s responsibilities during voluntary liquidation?
Despite having no power or control over the company during voluntary liquidation, the director still has a duty to answer any questions from the appointed liquidator and provide information in a timely fashion.
The CVL liquidator has an obligation to investigate the company’s affairs, including a review of its transactional history. This will identify any wrongdoing, examples of misconduct or malpractice, and whether any assets are recoverable.
Directors should also be prepared to discuss with the liquidator any personal guarantees or monies owed to or from the company. It’s also advisable to provide any evidence that the creditors’ best interests were put before those of the company before the liquidation process commenced.
How long does voluntary liquidation take?
Voluntary liquidation aims to bring an efficient, orderly end to the business.
A CVL can take as little as 3 months, depending on the director’s cooperation and the promptness with which any requested information is provided. However, in most cases, it’s usually between 6 and 24 months.
By contrast, an MVL is generally quicker than a CVL and is often completed within 6 to 12 months.
How much does voluntary liquidation cost?
The typical cost to put a company into creditors’ voluntary liquidation is between £4,000 and £6,000 (plus VAT). However, this can vary between insolvency companies and is determined on a case-by-case basis.
There may also be some costs that the director is not initially made aware of, such as potential personal claims. Therefore, discussing your quote with a qualified insolvency practitioner will help provide a clearer idea of the expected costs of voluntary liquidation.
By contrast, a members’ voluntary liquidation costs between £1,500 and £4,000 (plus VAT). This includes the liquidator’s fee (based on the size and nature of the process), plus small disbursements that cover expenses such as posting legal notices.
As with insolvent liquidations, directors should discuss the full costings with an insolvency firm before enlisting its services. This will reduce the risk of any hidden costs further down the line and ensure complete transparency across all parties.
Compulsory liquidation
Compulsory liquidation is usually triggered by a creditor’s legal action when a company fails to meet its financial obligations on time (such as paying off debts or resolving creditor disputes).
It has the same result as a CVL, but the chance of misconduct allegations is far greater.
This is because the decision has been forced on you rather than being voluntary, like with a CVL. In the case of compulsory liquidation, you’ve waited for a creditor to take court action, as opposed to being proactive and taking responsibility for your business’s financial situation at the earliest opportunity.
Rather than a director-led approach, compulsory liquidation results from a Winding Up Petition (WUP) issued by a creditor, offering less control and usually taking longer than a CVL.
What is the compulsory liquidation process?
The compulsory liquidation process usually starts with a creditor issuing a WUP against your organisation. This is initiated by creditors who are owed more than £750 by the organisation in question and have evidence that the statutory requirements for repayment have not been met (e.g., a statutory demand has not been resolved within 21 days).
Failing to respond to this by either contesting or clearing the debt means the courts will likely escalate this to a winding-up order against your company, forcing your business to close.
An official receiver or liquidator will then be appointed to oversee the compulsory liquidation process, over which the directors have no choice.
Their role is to:
- Investigate your conduct as a director in the period leading up to insolvency
- Pursue outstanding debts
- Handle employee matters, such as redundancy claims
- Distribute proceeds to creditors
What are the director’s responsibilities during compulsory liquidation?
During the compulsory liquidation process, the company’s director loses all power and control over the business.
They have a responsibility to fully cooperate with the official receiver, answer their questions, and provide any relevant documentation they need for their investigation.
The director should also:
- Submit a Statement of Affairs within 21 days of a request, outlining all company assets, debts, and liabilities.
- Hand over all company assets and property to the liquidator.
- Attend any meetings or interviews when required.
How long does compulsory liquidation take?
Compulsory liquidation is typically the slowest type of liquidation. It often takes at least 12 months to conclude, though some cases have taken two years or more.
The initial court process alone can last up to three months from the date the creditor filed the winding-up petition.
Any subsequent asset realisation and investigations into director misconduct may involve court proceedings and legal disputes, which can further extend the overall timeline for completion.
Other factors that can affect how long compulsory liquidation takes include:
- The complexity of your company’s assets (i.e. selling property or intellectual property may take longer than easily realisable assets)
- Number of creditors (i.e. the more creditors there are, the longer it may take to agree on any outstanding claims)
- Any disputes and investigations, particularly those relating to director misconduct
- Level of cooperation by the director and/or stakeholders (i.e. how promptly financial records and any information requested by the liquidator are provided)
There is no legal limit on how long the liquidation process can take. The idea being that this will continue until all steps have been completed and the company’s affairs have been successfully wound up.
Consulting an experienced insolvency practitioner, such as our experts at the Liquidation Centre, can help manage your expectations on possible timeframes and ensure you meet the legal requirements of a director during the liquidation process.
What is the cost of compulsory liquidation?
The estimated cost of compulsory liquidation includes different components, such as:
- £2,600 (court deposit)
- £343 (filing fee)
- £13,200 (official receiver fee once the company enters liquidation).
- Creditors will usually instruct solicitors to complete the petition work, and these fees will vary per case
In addition, if the official receiver remains as the liquidator, 15% of any assets sold or debts collected will go to them.
Estimates are subject to change on a case-by-case basis and depend on the complexity of each liquidation.
Although the petitioning creditor will pay the initial costs, they will be reimbursed when the company’s assets are sold and its debts are collected.
Liquidation vs. administration
Liquidation and administration are both formal insolvency procedures.
They form part and parcel of the same issue – a pending or existing insolvency problem caused by an inability to pay debts or when the value of a company’s liabilities exceeds that of its assets.
Liquidation and administration both use implemented measures to limit further financial damage to businesses and protect their creditors’ interests.
However, there are differences between the two, both in their objectives and in how they’re applied to businesses.
What is the difference between liquidation and administration
The difference between liquidation and administration is that the former is a method usually used to wind down a business. In contrast, the latter is usually applied with the intention of business recovery and rescue, in the hope that the business can be made profitable again.
Company administration is seen as the more constructive approach, whereas liquidation reflects the end of the road for the organisation in question and is the next step to closing it down.
From a trading perspective, administration may occur where a director identifies severe cash flow problems within a company, yet still believes the business is viable, and that terminal insolvency can be avoided.
Liquidation, on the other hand, is the opposite: the company in question is already terminally insolvent and cannot pay its creditors. There is no hope of recovery, and the company’s assets must be sold to raise funds for its creditors.
Whether your company is facing administration or liquidation, you need to make the right decisions as early as possible. This will ensure that you’re compliant with any legal requirements as a director and reduce the risk of any misconduct allegations further down the line.
It can be illegal to trade while insolvent. If caught, you could face fines, imprisonment, and potentially disqualification from becoming a director in the future.
Getting advice from a licensed insolvency practitioner, such as those at the Liquidation Centre, can put you in the strongest position and mitigate against any unnecessary consequences.
Insolvency vs. liquidation
Insolvency and liquidation are often used interchangeably. As a result, this can lead to confusion and cause people to believe they’re the same thing.
Insolvency is when a company can no longer fulfil its financial obligations to its creditors (i.e. pay off its debts). At this point, it’s considered insolvent and may be forced into liquidation if no action is taken.
Liquidation is the formal procedure for winding down a company (i.e., closing it). It can be used for both solvent and insolvent corporations.
What is the difference between insolvency and liquidation?
There are many differences between insolvency and liquidation:
Nature – Insolvency describes the state of a company’s finances and the position in which it cannot pay its debts. Liquidation, however, is the legal method for closing this business, releasing its value, and selling any assets to pay off shareholders, including creditors.
Outcome – Insolvency can be a temporary state and can be turned around so that a struggling company recovers and returns to solvency, whereas liquidation is a permanent process that leads to the organisation’s closure.
Role of the director – Directors of an insolvent company can seek advice on the best course of action (i.e., rescue or wind-down). However, once a business enters liquidation, the director loses all control of the company and must fully cooperate with the appointed liquidator.
Is insolvency the same as liquidation?
No, insolvency is not the same as liquidation.
Insolvency describes the financial state of a company when it’s unable to settle its outstanding debts. In contrast, liquidation is a legal process used to shut down the company and recover any losses for the company’s creditors.
What is the meaning of insolvent liquidation?
Insolvent liquidation occurs when a company is closed because it cannot pay its bills or settle its debts with creditors, or because the value of its business assets is less than its liabilities (known as balance-sheet insolvency).
Getting help with different types of liquidation
We appreciate that closing down your company can be a stressful and daunting experience for any director.
Given the many types of liquidation, this could add greater complexity to the situation.
Help is on hand to guide you through the liquidation process, whichever route you choose.
The Liquidation Centre has helped thousands of businesses navigate the complexities of limited company liquidation.
With more than two decades of experience and a proven track record, our team of insolvency experts are here to answer any questions, simplify the liquidation process as much as possible, and enable you to meet the legal and statutory requirements as a director.
For more information, check out our page on how to close my limited company.
Alternatively, contact us today for a free quote and consultation.
How to avoid liquidation
The liquidation process can be an unfortunate and stressful time for all those involved in the business.
Avoiding the need to liquidate your company may be possible if issues are detected early enough and a business recovery action plan is put in place.
Here are some suggested strategies that may help reduce the risk of liquidation for your company and help safeguard its survival:
- Ensure strong financial management practices by maintaining accurate, up-to-date financial records, including periodic cash flow analyses, budgets, and economic forecasting reports. This will help identify any potential issues early and inform proactive decision-making.
- Monitor and control outgoings by regularly reviewing your expenses and ensuring they don’t exceed revenue streams. Identifying cost-cutting opportunities, negotiating costs with trade partners, and implementing efficiency measures can all help improve your company’s financial model.
- Diversify your income as much as practically possible. Relying on a single market or product can leave you exposed to market vulnerabilities; therefore, diversifying your consumer base, product range, including services can help reduce dependency and mitigate financial risks.
- Having a steady cash flow is essential to a company’s financial stability. This may include introducing credit control, incentives for customers who pay early, and exploring alternative external finance options.
- Seeking professional support and advice is a great way to keep your business ticking over and heading in the right direction. This may involve a consultation with insolvency experts to gain insights into how to better manage your company’s finances. They can also identify potential pitfalls you may encounter and show you how best to navigate them.
Final thoughts
The process of formal voluntary liquidation (whether solvent or insolvent) must be carried out by a licensed insolvency practitioner.
Changes made early enough to your business could mitigate the risk of liquidation and alleviate any serious future financial worries.
However, this won’t always be possible. Therefore, understanding the different types of liquidation can help put you in the best position to manage the process should it arise and to decide the best course of action for your company’s future.
The good news is that you’re not alone.
Here at the Liquidation Centre, we offer a partner-led service, with independent advice, support, and guidance for directors of both solvent and insolvent companies.
Should you require more information or have additional questions, please contact us. Whether you’re arranging a meeting, booking a free consultation, or getting a quote, one of our insolvency experts will be on hand to help.
FAQs about types of liquidation
Why does a company go into liquidation? ▸
A company tends to go into liquidation when it becomes insolvent (i.e., it cannot pay its bills and debts to its creditors) or when the business is solvent, and the directors or shareholders have chosen to close it down.
What happens when a company goes into liquidation? ▸
When a company goes into liquidation, a liquidator is appointed. The business usually ceases trading and any assets are sold off to help clear any outstanding debts to its creditors.
Upon completion of the liquidation process, the organisation will cease to exist as a legal entity and will be removed from the Companies House Register.
In the event of an insolvent liquidation, the liquidator will investigate the conduct of any director(s) to assess whether they have fulfilled their legal requirements in the period leading up to insolvency.
What is voluntary liquidation? ▸
A voluntary liquidation is when a company decides to wind down, rather than being forced to. The two types of voluntary liquidation in the UK are Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL).
What is Creditors' Voluntary Liquidation? ▸
Creditors’ Voluntary Liquidation is when an insolvent company can no longer afford to pay its bills or clear its debts, or when the business has become commercially unviable.
What is Members' Voluntary Liquidation? ▸
Members’ Voluntary Liquidation is when a solvent business chooses to shut down. This could be because the company has run its course or served its purpose. Alternatively, the directors or stakeholders might want to retire, invest the profits in another opportunity, or realise company assets for tax purposes.
What happens to a director of a company during liquidation? ▸
During the liquidation process, a director will lose all power and control that they previously had over their business.
They’re required to fully cooperate with any investigations, answer any questions the liquidator may have, and provide all necessary documentation to facilitate a smooth transition.
Is administration the same as liquidation? ▸
No, administration is not the same as liquidation.
Despite both being recognised as formal insolvency procedures, administration aims to rescue the struggling company, whereas liquidation focuses on winding the company down and settling any outstanding debts.
Is going into administration the same as going bust? ▸
No, a company going into administration is not the same as ‘going bust’.
‘Going bust’ is another word for liquidation (the formal process of winding up a company). This is contrasted with administration, which seeks to rescue and recover the struggling business, aiming to make it profitable, and so that it can settle any outstanding debts or bills.