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What is a Company Liquidation?

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Posted in: Liquidation 14 Feb 23

When a company becomes insolvent, directors need to take appropriate action to deal with the situation, which is usually to cease trading and close the company down.  It won’t be possible to simply dissolve the company at Companies House using a voluntary strike-off application, since this is likely to be opposed by creditors of the company.  This leaves the directors with 2 options.

Voluntary Liquidation

This is where the company enters liquidation “voluntarily” and the full name is Creditors’ Voluntary Liquidation or CVL.  The directors will engage an insolvency practitioner to make the necessary preparations, including a report which details all financial information on the company.   A company is placed into voluntary liquidation by its shareholders, who will vote either via a meeting or using written resolutions.  Shortly after this a creditor “virtual meeting” is called, essentially a conference call which allows any creditor who wishes to call in and ask questions about the company’s situation.  Creditors are also asked to confirm the appointment of Liquidators and the fees proposed to be charged.

The Liquidator’s fees can be paid from any cash in the company, or when assets of the company are solved or recovered.  If there are insufficient funds, then the directors will usually be asked to contribute personally towards the liquidation costs. 

Compulsory Liquidation

Compulsory liquidation is where a creditor of the company makes an application to court for the company to be would up.  To do this a creditor must be owed £750 or more, and be able to prove the debt is valid.  The creditor will incur legal costs, which are typically between £2,000 and £4,000, which they will only get back if there are sufficient funds in the liquidation once it takes place.  The company can defend this application in court, but again legal costs will be incurred and unless the liability is repaid or the creditor withdraws their application, the company will ultimately end up in liquidation.

Unlike in a voluntary liquidation, once a company is wound up in the courts the Official Receiver will be appointed Liquidator.  They will interview the directors of the company and investigate what has gone on.  However, if enough creditors wish, an Insolvency Practitioner can be appointed Liquidator in place of the Official Receiver.  This is usually where creditors believe there are investigations to be carried out and/or assets to realise.

Impact on Directors

Whether a company ends up in voluntary or compulsory liquidation, the impact on directors is broadly the same.  In both circumstances an investigation into the company and the conduct of the directors will be undertaken, and a confidential report sent to the Insolvency Service.  Directors will be required to co-operate with the Liquidators as required but, unless disqualified or bankrupt, are able to act as directors of other limited companies.

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Robin Tarling

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