What Are Liquidation Proceedings in the United Kingdom?

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What Are Liquidation Proceedings?
In the UK, there is a set process to closing down
or restructuring a limited company, whether it is
solvent or insolvent. This process is known as
liquidation and can only be handled by a
licensed insolvency practitioner (IP) in
accordance with the Insolvency Act 1986.
Types of liquidation proceedings
There are four main types of company liquidation
process Creditors Voluntary Liquidation (CVL)
Compulsory liquidation Administration
and Members Voluntary Liquidation (MVL). The
first three are applicable to companies that are
insolvent, i.e. their debts are greater than
their assets and they are unable to pay their
creditors. The last one, an MVL, is applicable to
a solvent company only that wishes to close down
or is facing a major restructure.
Creditors Voluntary Liquidation (CVL)
A CVL is a formal company liquidation process
whereby the directors voluntarily choose to cease
trading and wind up an insolvent company. If a
company is unable to meet its financial
liabilities when they fall due and its
liabilities are greater than its assets, it is
deemed an insolvent company. In these
circumstances, it is important that the company
ceases trading if the business continues to
trade, the directors could be held personally
liable and it could result in the insolvency
practitioner reporting wrongful trading, known as
misfeasance, which may lead to legal action. The
directors appoint an insolvency practitioner and
once this has been agreed and confirmed, there is
a meeting with the shareholders. They have to
agree that the company is (a) insolvent, and (b)
the best option is a Creditors Voluntary
Liquidation. Of course, if there are no
shareholders, this step of the process is not
necessary. The IP takes control of the company
and starts the company liquidation process. The
directors are no longer involved in what happens,
including the sale of the companys assets.
However, if the directors want any of the assets,
they can notify the IP. This is known as an in
specie distribution and the IP arranges for the
assets to be transferred but the directors must
pay the current value of the asset.
The appointed insolvency practitioner liaises and
negotiates with the companys creditors, collects
any outstanding book debts, handles any employee
redundancy claims, arranges for assets to
be valued and sold, distributes the realised
funds to creditors in accordance with the
Insolvency Act 1986s specific order, submits the
necessary reports to finalise and pay any tax
liabilities, and finally closes the company
including applying for it to be removed from
Companies House register.
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Compulsory liquidation
The compulsory liquidation process is very
similar to that of a CVL. The main difference is
that the companys creditors applied to the court
for a winding up order which forces the insolvent
company into a liquidation process. In most
cases, creditors take this action as a last
resort because they havent received payment
through other forms of negotiation. The court
appoints an insolvency practitioner, also known
as an official receiver, to conduct the
compulsory company liquidation process. They take
control of the company from the directors,
although at least one director remains to work
with the official receiver in winding up the
company. This type of company liquidation is not
voluntary and directors conduct is reported to
the UKs Secretary of State once the liquidation
process has been completed. Therefore, any
director that fails to cooperate with the IP or
has been involved in director misconduct, or a
fraudulent act, may result in serious
repercussions.
Administration
Administration is an alternative to liquidation
when winding up an insolvent company. It is used
as a way to protect the company from any legal
action by its creditors. The directors of the
company agree to make regular payments to settle
their debts over a period of time. The appointed
administrator handles the voluntary
administration process, and receives the payments
which they then distribute to creditors according
to the agreed amounts. Once the agreement is in
place, the administrator hands back control to
the directors but continues to act as a
supervisor. Alternatively, the insolvency
practitioner will look to find a buyer for the
company. If a company is not able to agree a
debt management plan with creditors, the
administrator takes over the company with the aim
of agreeing better payment arrangements for the
creditors. An administrator will draw up a Deed
of Company Arrangement (DOCA) which is binding
for all parties. The voluntary administration
process starts with a moratorium period that
lasts for eight weeks and stops any creditor from
taking legal action. This provides the company
with time to develop a plan going forward to
rescue the company and avoid liquidation.
However, at this point, directors hand control of
the company over to the appointed administrator.
Members Voluntary Liquidation If a company is
solvent but the directors and shareholders want
to close the business, a Members Voluntary
Liquidation is the right option. For a company
to be considered solvent it must have the
necessary resources to pay off all its creditors
within 12 months, such as being able to pay its
VAT and Corporation Tax to HMRC. There are
various reasons why directors of a solvent
company may want to close a company
The owner/directors of the company want to
retire There is no-one to take over the company
should the owners/directors wish to retire The
purpose of the company no longer exists A
contractor wishes to wind up the company to take
on a full-time role elsewhere The company is
being restructured or the structure is being
simplified under Section 110 of the Insolvency
Act 1986 The company is being divided or its a
demerger and assets need to be transferred. This
is known as a restructuring members voluntary
liquidation.
The company liquidation process is managed by a
liquidator appointed by the directors and
shareholders of the company and they must sign a
declaration that there are no creditors
remaining. The liquidation process for an MVL is
similar to that of a CVL in that assets are
realised but the proceeds are distributed to the
directors and the shareholders of the company
after the liquidators fees have been paid. The
shareholders will receive their regular dividend
as well as a liquidating dividend, which is their
investment back. If you are considering winding
up an insolvent or solvent company, or you are
facing a compulsory liquidation, the first step
is to seek professional advice. Our highly
experienced professionals at Leading UK are on
hand to help on any of these issues.
By Viv1 September 12th, 2021 Liquidation 0
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