There are several different types of liquidation, each with its own advantages and disadvantages.
The most common type of liquidation is voluntary liquidation, which is initiated by the company itself. This type of liquidation allows the company to control the process and choose the best time to sell its assets.
Each procedure is used under specific circumstances, and the initial choice is led by whether the company is solvent or insolvent.
Lets take a look at the three types of liquidation, for both insolvency and solvent companies
What are the different types of liquidation
There are three different types of liquidation in the UK, each with its own advantages and disadvantages. The most common type is a creditors voluntary liquidation, which is typically used when a company is insolvent and unable to pay its debts. In this case, the company’s creditors vote to appoint a liquidator, who then oversees the process.
Another type of liquidation is members voluntary liquidation, also known as a solvent liquidation which is typically used when a company is solvent but wants to close down voluntarily. In this case, the company’s directors appoint a liquidator to oversee the process as per the insolvency act.
Finally there is compulsory liquidation, which is typically used when a company is insolvent and unable to pay its debts. This type of liquidation is overseen by a court, and the purpose of liquidation is to liquidate assets are sold off to repay creditors.
Understanding the different types of liquidation in the UK can help you choose the best option for your business.
These are three different types of Liquidation:
1. Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is a process that can be used by companies who are insolvent, meaning they are unable to pay their debts. This process involves the appointment of a licensed insolvency practitioner (IP) who will act as the liquidator. The IP will then work with the company’s creditors to reach an agreement on how the company’s assets will be distributed.
Once the agreement is reached, the IP will carry out the liquidation and asset distribution in accordance with the agreement. The CVL process can be an effective way to resolve a company’s financial difficulties and protect creditors from loss. However, it is important to note that this process can also have some negative consequences, such as damaging the company’s reputation and causing job losses.
2. Members’ Voluntary Liquidation
A members’ voluntary liquidation (MVL) is a process whereby a company’s assets are sold off and the proceeds distributed to its shareholders. This type of liquidation is typically used when a company is solvent and needs to raise funds to pay off its debts. In an MVL, the company’s directors must firstly declare that they believe the company will be able to pay its debts in full within 12 months.
They must then appoint a licensed insolvency practitioner (IP) to oversee the liquidation process. The IP will assess the company’s financial situation and formulate a plan for selling off its assets. Once the IP has been appointed, the company will be wound up and its assets sold off.
The proceeds from the sale of assets will be used to pay off the company’s debts, and any leftover funds will be distributed to shareholders. If you are a shareholder in a company that is considering an MVL, it is important to seek professional advice to ensure that you understand your rights and obligations.
3. Compulsory Liquidation
What is Compulsory liquidation, It is also known as “winding up” a company. This process can be initiated by a court order in response to a creditor’s winding-up petition or by the company itself, its directors, or other stakeholders. The most common reason for compulsory liquidation is when a company is unable to pay its debts.
Once a company is in compulsory liquidation, its affairs are managed by a court-appointed liquidator, who is responsible for collecting and selling the company’s assets and distributing the proceeds to its creditors. Any remaining funds are then distributed to the company’s shareholders. The process of compulsory liquidation is a serious matter and can have significant consequences for a company’s directors, officers, and shareholders.
In some cases, it may be the best option for both the creditors and the shareholders. If a company is struggling to stay afloat, compulsory liquidation may be the best way to ensure that its debts are repaid and its shareholders receive some compensation for their investment.
Dependent on if your company is solvency or insolvent will depend on types of liquidation available to you. If your plan is to liquidate a company via an CVL or MVL, an insolvency practitioner must be apointed to act as the ‘liquidator’. We are here to discuss your company’s situation and the different types of liquidation available to you.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.