What is liquidation?
Legal liquidation is a formal insolvency procedure, where an insolvency practitioner is appointed as liquidator of a company for the purpose of releasing the assets of that company and distributing those assets to the company’s creditors, to pay off that they are owed.
The liquidation procedure is governed by the Insolvency Act 1986 and the Insolvency Rules 1986. Liquidation is often referred to as a terminal procedure because in a liquidation, the business will cease to trade. At the end of a liquidation, the company will be dissolved or wound-up which is why liquidation is often referred to as “winding-up”.
Different liquidation procedures
There are two main types of liquidation: compulsory and voluntary. Voluntary liquidation may be in the form of either a “member’s voluntary liquidation” or a “creditor’s voluntary liquidation”.
Compulsory liquidation is the Court-based procedure for winding-up a company. The procedure begins when a winding-up petition is presented at Court (usually by a creditor of the company to be wound-up). There are very strict rules as to how a winding-up petition is served on the company and how this can be advertised and these rules must be followed by the petitioner.
Obtaining a winding-up Order
At a hearing of the winding-up petition, the Court may decide to make a winding-up Order, or to dismiss or adjourn the petition depending on the representations made by the company and the petitioner at the hearing.
The Court will only make a winding-up Order if one of the grounds set out in the Insolvency Act 1986 is met (usually that the company is unable to pay its debts as they fall due).
In order to prove that the company is unable to pay its debts as they fall due, the petitioner will most likely have served the company with a Statutory Demand for payment of the debt before a Winding-Up Petition has been presented at Court.
This is why it is so important if a company receives a Statutory Demand, for the directors to take legal advice and action as soon as possible to avoid the presentation of a Winding-up Petition.
If the Court makes a Winding-up Order then initially, the Official Receiver (a civil servant employed by the Department for Business, Innovation & Skills) will be appointed as liquidator of the company unless and until the Official Receiver appoints an insolvency practitioner to take over as liquidator (or the company’s creditors decide to appoint a liquidator of their own choosing).
A creditor of my company has presented a Winding-up Petition at Court – what should I do?
If a creditor of your company presents a Winding-up Petition at Court you must act without delay to seek legal advice and determine your options. We can respond very quickly in these situations but the more time we have the more options you will have to avoid your company being wound-up. If you are being threatened with winding-up, please contact us as soon as possible for advice.
I am a creditor of a company and I think it is insolvent – what can I do?
If you are owed a debt by a company that you think is unable to pay that debt, contact us as soon as possible for advice on recovering the debt and whether or not you should consider issuing a Statutory Demand and then a Winding-up Petition.
It may be that there are other options available to you for recovery of the debt without going down the route of a Winding-up Petition (and the law says that a Winding-up Petition should never be used as a debt collection tool, but only in genuine cases of suspected insolvency). For that reason you should make sure that you take advice before going down the route of seeking to wind a company up.
The main difference between a creditor’s voluntary liquidation (CVL) and a member’s voluntary liquidation (MVL) is that in the case of an MVL the directors of the company have to make a Statutory Declaration that the company will be able to pay its debts in full, with interest, during the next 12 months. This is important because an MVL requires a company to be solvent and is often referred to as a “solvent liquidation”.
In a CVL the company is unable to pay its debts as they fall due and the directors and shareholders of the company resolve to place the company in liquidation. The CVL is run for the company’s creditors and the company’s unsecured creditors will have a significant interest in the outcome of a CVL because it is unlikely that they will be paid their debts in full.
Creditor’s Voluntary Liquidation (CVL)
Meeting of Creditors
Usually the first a creditor will hear of the potential for a CVL will be a letter from the company giving the creditor notice of a meeting of creditors under Section 98 of the Insolvency Act 1986 (which is known as a Section 98 meeting).
The meeting of creditors is an opportunity for creditors to ask questions of the directors of the company, to understand why the company is insolvent and why a liquidation is required. It is only on the vote of the creditors at the meeting that a decision to place a company into CVL will be approved.
If you or somebody you know receives a Section 98 notice you have very little time in which to react. It is therefore very important if,as a creditor, you receive a Section 98 notice, that you take advice on your rights as quickly as possible. We have a great deal of experience acting for and representing creditors at Section 98 meetings and have been able to secure much better outcomes for our clients as a result of our intervention at those meetings.
Member’s Voluntary Liquidation (MVL)
MVLs are often used to realise assets in a company in order to pay all of the company’s creditors; the costs of the MVL process and to make a distribution to the shareholders of the company. The critical difference between an MVL and a CVL is that in an MVL all of the company’s creditors are paid in full and after all creditors have been paid and the costs of the liquidation have been met, there are funds available for payment to the shareholders.
MVLs can be very useful processes for restructuring groups of companies or for realising assets that would otherwise not be sold and can sometimes be more tax-efficient for shareholders. Although MVLs are common, they are specialist procedures and you should seek accounting, tax and legal advice as soon as possible prior to commencing an MVL in relation to your company.
Speak to a corporate law solicitor about liquidation
To discuss your situation further without any obligation contact our experienced team of specialist corporate law solicitors today. Bray and Bray has three main offices in Leicestershire, contact us to discuss an enquiry or a case you have or feel free to pop in and see us at your local office by clicking on the links below:
Leicester call us on 0116 254 8871.
Hinckley call us on 01455 639 900.
Market Harborough call us on 01858 467 181.
Corby call us on 01536 851050.