Three Different Types Of Liquidation

Overview Of The Three Different Types Of Liquidation

There are three different types of Liquidation as follows:

• Compulsory Liquidation
• Creditors Voluntary Liquidation
• Members Voluntary Liquidation

Guide To The Compulsory And Voluntary Closure Of Companies

These different types of Liquidation have been created in the Insolvency Act 1986 to enable a company to be wound up in an orderly manner. A company has to have the option of ceasing to trade either if it wishes to do so or if it needs to do so when it does not have a viable future. Liquidation provides that solution.

The two voluntary Liquidation procedures are not forced whereas Compulsory Liquidation is a procedure typically imposed on a company by a creditor who takes it to Court.

Compulsory Liquidation

Compulsory Liquidation is a court procedure set out in Part IV Chapter VI of the Insolvency Act 1986 that follows typically when a creditor has issued a winding up petition and obtained a winding up order.

If a creditor is owed more than £750 they can petition the Court for a winding up order for the company to be placed into Compulsory Liquidation. It is a procedure that can be initiated by the company itself but more commonly it will be started by a creditor (such as HMRC for example only) who will petition the Court for the winding up order. For that reason, it is mainly used to wind up an insolvent company.

Of the three Liquidation procedures, it is the only one that enables creditors to force the company into Liquidation. It tends to be slower to get the company into Liquidation compared to Creditors Voluntary Liquidation because it is a process overseen by the Court. The Court has to list the winding up petition for a court hearing, often for an Insolvency and Companies Court Judge to consider if it should be wound up.

In the first instance, the Liquidator will be the Official Receiver who will investigate the causes of the company’s failure. He or she will decide if they are to remain as the Liquidator. If creditors wish they can look to appoint a Liquidator in the private sector through convening a decision process to enable a vote on a successor to the Official Receiver.

The Liquidator will be responsible for the company’s affairs and have a duty to realise its assets with a view to distributing them to creditors in accordance with the Statutory Order of Payment after taking into account their costs and the other expenses of the Liquidation.

Creditors Voluntary Liquidation

Creditors Voluntary Liquidation is a voluntary procedure set out in Part IV Chapter II of the Insolvency Act 1986 that is used in respect of an insolvent company. 

This is a procedure initiated by the Directors and or Shareholders of a company who will usually look to appoint a Liquidator of their choice to assist them with placing the company into Liquidation. This will involve passing a winding up resolution following a meeting of the company’s Members/Shareholders at which point a Liquidator will be formally appointed. 

The Liquidator will be an Insolvency Practitioner whose appointment will be approved by the creditors following a decision procedure once the winding up resolution has been passed.

It is often the case, particularly in smaller cases that the Director’s nomination for the appointment of Liquidator will go unopposed by creditors. 

It is a process that is usually quicker to get into Liquidation than through Compulsory Liquidation. The Liquidator has very much the same role but he or she will need to provide a report on the conduct of the Director to the Director Conduct Reporting Service.

The difference between Creditors Voluntary Liquidation and Compulsory Liquidation is the absence of the Court’s involvement in placing the company into Liquidation. 

Members Voluntary Liquidation

Members Voluntary Liquidation is a voluntary procedure set out in Part IV Chapter III of the Insolvency Act 1986 that is used in respect of a solvent company. That is the key difference between Members Voluntary Liquidation and Creditors Voluntary Liquidation.

The needs of a solvent company are very different from an insolvent one, particularly where the duties to and involvement of creditors is concerned. Both these different types of Liquidation will have a Meeting of Members/Shareholders to put the company initially into Liquidation. 

In a Members Voluntary Liquidation, it is a requirement the Directors confirm via a Statutory Declaration of Solvency that the company is solvent. As long as the company is solvent there is no need for a decision procedure for creditors; they will simply have their debt paid. 

The Liquidator (as with all Liquidators), once appointed, will take control of the company with the aim of realising the assets to discharge creditor debts within twelve months before making a distribution to the Shareholders.

A Members Voluntary Liquidation is often deployed as a tax-efficient process to enable the Shareholders to wind up the company and extract capital tied up in their shareholding in the company. 

In a Members Voluntary Liquidation, the Shareholders can anticipate a return on their investment whereas in both Creditors Voluntary Liquidation and Compulsory Liquidation it is unlikely they will receive anything. 

In all cases, once the company goes into Liquidation it will be under the control of the Liquidator and not any longer its Directors.