Types of Liquidation in the UK (2024)

In very simple terms, there are three different types of liquidation process: solvent, insolvent and compulsory.

In this article, we will explain each type, including the circ*mstances under which they occur, the process involved, and their effects on the company and its stakeholders.

Understanding the Various Types of Liquidation Available to UK Companies

Compulsory Liquidation

• Initiated By: Creditors (often HMRC) when the company cannot pay its debts.
• Key Risks:The company ceases to exist, directors face investigation, employees lose jobs, and shareholders are unlikely to receive any payment.
• Process Overview: Begins with a court hearing, followed by the appointment of an Official Receiver to liquidate the company.

Compulsory liquidation occurs when a court orders the winding up of a company.

How Does the Process Start?

This type of liquidation is initiated by the company’s creditors (often HMRC) when the company is unable to pay its debts[1]Trusted Source – GOV.UK – Liquidation and insolvency.

The actual process of compulsory liquidation begins with a court hearing, where the creditors present evidence of the company’s inability to pay its debts to a judge. If the court finds that the company is insolvent, it will issue a winding-up order, and appoint an Official Receiver to liquidate the company.

What Does the Liquidator Do?

The liquidator’s role in compulsory liquidation is to take control of the company’s assets, sell them, and distribute the proceeds to the creditors in order of priority. The liquidator will also investigate the company’s affairs and report any misconduct or illegal activities to the relevant authorities.

Compulsory liquidation has significant implications for the company and its stakeholders. The company will cease to exist, its directors will lose control of the company, and its employees will lose their jobs. The company’s assets will be sold, and the proceeds will be used to pay off the creditors. Shareholders are unlikely to receive any payment, as they are at the bottom of the list of priorities for payment.

Now, we’ll cover the two types of voluntary liquidation.

Creditors’ Voluntary Liquidation

• Initiated By: Company’s directors and shareholders due to insolvency.
• Key Risks: Loss of control for directors, potential job losses for employees, financial losses for stakeholders. Directors face investigation
• Process Overview: Directors convene meetings with shareholders and creditors to appoint a liquidator, who then sells assets and distributes proceeds to creditors.

Creditors’ voluntary liquidation is the official term of voluntary liquidation initiated by the company’s directors and shareholders due to insolvency.

Why Choose CVL?

By choosing a CVL, the directors can take control of the situation and initiate the liquidation process rather than waiting for the creditors or the court to force the company into compulsory liquidation. This can help to minimise the financial losses for the company’s stakeholders, including employees, creditors, and shareholders.

How Does the Process Work?

The CVL process begins with the directors convening a meeting of the company’s shareholders to pass a resolution to wind up the company.

The directors will then convene a meeting of the company’s creditors, at which the creditors can appoint a liquidator of their choice. If the creditors do not nominate a liquidator, the company’s shareholders may appoint one of their own.

The role of the liquidator in CVL is to take control of the company’s assets, sell them, and distribute the proceeds to the creditors in order of priority. The liquidator will also investigate the company’s affairs and report any directorial misconduct to the Insolvency Service.

Members’ Voluntary Liquidation

• Initiated By: Company’s directors and shareholders when the company is solvent and no longer needed.
• Key Risks: Higher costs compared to voluntary strike off.
• Process Overview: Directors declare solvency, then convene a shareholders’ meeting to appoint a liquidator who sells assets and distributes proceeds to shareholders.

Why Choose MVL?

Members voluntary liquidation occurs when a solvent company chooses to wind up its operations and distribute its assets among its shareholders. This type of liquidation is often used by companies that have achieved their objectives or are no longer needed[2]Trusted Source – GOV.UK – Liquidate a company you do not want to run anymore.

How Does the Process Work?

The MVL process begins with the directors passing a resolution to wind up the company and declare its solvency.

Once the declaration of solvency has been made, the directors will convene a meeting of the company’s shareholders, who will pass a resolution for the appointment of a liquidator. The role of the liquidator in MVL is to take control of the company’s assets, sell them, and distribute the proceeds to the shareholders.

MVL has significant implications for the company and its stakeholders. The company will cease to exist, and its directors will lose control of the company. However, as the company is solvent, its employees will not lose their jobs and may be entitled to claim redundancy pay from the government. The shareholders will receive their share of the proceeds from the sale of the company’s assets.

Members’ voluntary liquidation (MVL) can be a tax-efficient way for shareholders to receive the proceeds from the sale of a solvent company’s assets. This is because, in an MVL, the shareholders are treated as having received a capital distribution rather than income, which is subject to lower tax rates.

FAQs on the Types of Liquidation