What is liquidation and how many variations are there?

• Members' voluntary liquidation also known as members' voluntary winding up  is when  shareholders of a company decide to put their business into  the liquidation procedure whilst there are enough assets to pay all the debts of the company, i.e. the company is still trading as solvent.
• Creditors' voluntary liquidation also known as creditors' voluntary winding up)  is when the directors and also shareholders of a company decide to put their business into liquidation because there are not enough assets to pay all the creditors therefore the company is insolvent and to carry on trading would be an offence.
• Compulsory liquidation also known as compulsory winding up) is when a court orders a company to be wound up and is better  known as a winding-up order placed on an appropriate person by petition usually by a creditor. If the company has more than one director, all of the directors must jointly present the winding-up petition as a single director may no alone present a winding-up petition.

As a director or shareholder of a business you are also a creditor of your company therefore can present a winding-up petition on the grounds that the company cannot pay its debts.

Are there alternatives to liquidation?

• An Informal Arrangement - the company may wish to contact all its creditors, in writing, asking for consideration  to a mutually acceptable agreement can be agreed regarding payment terms including a timetable of when payments will be made.
• Company Voluntary Arrangement (CVA).  Is a formal procedure to the Informal Arrangement described in the previous paragraph and the directors would need to apply to the court using the services of an authorised IP who supervises the arrangement and ensures payment to creditors in line with the accepted proposals.
• Administration  is a procedure that gives the company time and subsequent space from any action by creditors and the  administration order must be to:-
• rescue the company as a going concern
• achieve a better result for creditors than if they had entered into liquidation
• Make a sale of property to allow a distribution to one or more secured / preferential creditors

This procedure must be managed by an authorised Insolvency Practitioner (IP) who will act as the administrator.

Winding up and liquidating a company

When a company is unable to pay its debts and has not got the benefit an arrangement or period of administration which may save it then a director, may propose creditors' voluntary liquidation (CVL).

In a CVL the company must table and pass a resolution that it company cannot continue and that a meeting of creditors is to be called. Those creditors at the arranged meeting will appoint a liquidator who will proceed with the winding up of the company.

Compulsory liquidation, under a court order, can also wind up a company  If it is found that there are sufficient assets in the business the official receiver will arrange for a meeting of creditors (first meeting) to appoint an IP who then becomes the liquidator.  An application for a Court order may be made by applying to the court but this is usually made by a creditor who is owed in excess of £750.

An official receiver is appointed to wind up the business in the matter of a Compulsory liquidation.

For an insolvent company the accounting date is reset to establish a fresh accounting period on the date that the liquidator or administrator is appointed. When officially wound up the company gets struck off the register and therefore ceases to exist from that point.

Payment Structure in Liquidation?

 Order of payment is fixed by statute and the normal rule is that the creditors are paid using the following priority structure:-

(a) A Secured Creditor holding fixed charges such as a bank lending money backed by a mortgage on land and buildings (and sometimes fixed plant) typically bargained for taking less risk. Assets of the company usually back the credit that they extend. They know they should get paid very early on the list if the company is liquidated. They will only receive payment to the extent of the value of the asset that is subject to the charge. They will have to prove as unsecured creditors for the excess if there is a shortfall.

(b) A Preferential Creditor who will be a “Preferred Creditor” in particular Crown and Government Offices / Departments in the order of payment by statute.

(c) A Floating Charge Holder differs from (a) above (Secured Creditor, holding fixed charges) as any fixed charges relate to specific assets such as buildings, fixed plant, machinery or land and only relate to specific named assets. A Floating charge "crystallises" on those assets which are held by companies only occasionally such as,  perishables or time sensitive goods and will be taken by banks and lending institutions in conjunction with the fixed charge as outlined at (a) above.

(d) Suppliers of goods and services, and any further lenders have a high priority for recovering their losses over shareholders. 
Shareholders and take a greater risk because they own the company and could possibly make more money if business achieves targets or lose money if does not. Owners are last in line to be repaid in a company failure as is determined by the Insolvency laws.

The choice -  CVA, Administration, Receivership or Winding up?

CVA allows a business to continue trading and allows greater control during the process for putting it back to a clean position. A company may plan to return to profitability however it may liquidate after all.

A Receiver becomes appointed, as per the provisions of a floating charge and those assets subject to the floating charge will be liquidated and the charge holder then takes those funds to off-set repayment of the debt. An excess would be returned to the company. However very often the result is that the company is eventually wound up.

The winding up of a company legally puts the business in a position where it must ceases trading.

Administration allows a business to re-organise whilst continuing to trade. If successful and profitable trading returns then the directors and shareholders may once again take control.

Voluntary Liquidation

A procedure where the directors of a company and IP. place a company into liquidation unlike a Compulsory Liquidation, where a creditor issues a petition through the Court to have the company wound up.

Voluntary liquidation allows a company to pay all of its creditors in full including costs that is if it has the assets to do so and is a solvent liquidation also known as a Members Voluntary Liquidation. Where the company has insufficient assets to pay all the creditors in full this is an insolvent liquidation also known as a Creditors Voluntary Liquidation. A Creditors Voluntary Liquidation is a commonly undertaken form of Voluntary Liquidation. Prior to placing a company into Creditors Voluntary Liquidation there must be a meeting of the company’s directors during which a motion is tabled and passed that a licensed IP will be engaged to assist in the convening of meetings to which the company shareholders creditors are to be invited.

That meeting is the first to be held  and during the meeting resolutions to place the company into Creditors Voluntary Liquidation along with the IP appointment to become the Liquidator is motioned and passed. Following that meeting a further meeting of the company’s creditors is called giving all the creditors present an opportunity to ask questions of the directors, usually seeking a reason for the company’s failure and to propose an alternative Liquidator, if so requested. When appointed the Liquidator assumes control of the company and its assets.
Creditors Voluntary Liquidation. (CVA).

A popular method for dealing with an insolvent company as the directors and shareholders themselves place the company into liquidation because it has become insolvent. An IP is appointed who becomes the liquidator and assumes the primary role of collecting the company’s assets and then to distribute them amongst the creditors.

 Is a CVL Appropriate?

A CVL means the company will cease to trade, assets realised and all employees of the business dismissed. Other procedures may be more suited to a situation and must be considered using professional advice i.e. an IP before making the decision. A full decision should be made against: - The Company will probably be insolvent or the directors do not wish to continue with a non viable business.

Procedure for Creditors Voluntary Liquidation

A board meeting is convened and a motion tabled and passed to engage an IP to aid with calling meetings of creditors and members. These meetings are normally held on the same day for the convenience of creditors during a business week day and are advertised with the London Gazette plus 2 local newspapers within the company’s trading location. 
Directors must be fully prepared to work with the engaged IP in producing a full and detailed trading history of the company along with financial information concerning company affairs. The report, when compiled, will be presented as the director’s report at the meeting of the company’s creditors.

Insolvency of partnerships

If the partnerships debts are in excess of its assets or it cannot produce sufficient income to pay debts as they fall due then it is insolvent. Partnership Voluntary Arrangement (PVA) may be proposed as a means of settling the creditor’s debts. However should an individual partner wish to remove their “joint and several” liability the whole debt requires to be repaid in full or an Individual Voluntary Arrangement (IVA) proposed. If neither PVA or IVA are an option then they will become the subject of personal bankruptcy.