What Is Voluntary Liquidation?

This guide is for anyone seeking to understand what is Voluntary Liquidation.

In this article you’ll learn about:

  • What is Voluntary Liquidation.
  • How to get a company into Voluntary Liquidation.
  • What a Liquidator does on appointment.

Let’s get started.

what is voluntary liquidation?

Voluntary Liquidation Overview

Voluntary Liquidation is a process available to any company that cannot or does not want to continue to exist.

The term ‘Voluntary’ Liquidation is important because it is a process that is not forced; it is a process that is freely undertaken by a company without obligation and therefore volunteered.

If a company has reached the end of its life either because it has failed or because it has succeeded but no longer trades, there has to be a process that enables it to be wound up in a fair and orderly manner. The most common form of such a winding-up is Voluntary Liquidation.

Whether the company is solvent or insolvent does not matter as such but alters certain aspects of the procedure and the parties who have a role to play in the Liquidation process. However, certain key principles remain the same.

A solvent Voluntary Liquidation is called a Members Voluntary Liquidation.

An insolvency Voluntary Liquidation is called a Creditors Voluntary Liquidation.

Key Principles Of Voluntary Liquidation

The key principles of company Liquidation are:

  • The process is voluntary as opposed to the alternative being Compulsory Liquidation via a Court Order.
  • A resolution of the shareholders has to be passed to put the company into Voluntary Liquidation.
  • A Liquidator is appointed to run the Liquidation.
  • Key parties affected by the Voluntary Liquidation (shareholders and in an insolvent company, the creditors) have a major say in the appointment of the Liquidator.
  • The Liquidator is independent of the shareholders, Directors and creditors.
  • The company’s affairs are addressed and all loose ends are tied up.
  • The assets and liabilities of the company are identified.
  • If creditors are suffering losses in an insolvent Liquidation then an investigation has to be undertaken to establish why that is the case.
  • The assets are realised to pay for the costs of the Liquidation and to distribute money proportionately to creditors and where availabe to shareholders.

Procedure To Get A Company Into Liquidation

In order to get a company into Liquidation, there is a whole raft of procedures that need to be effected.

You cannot simply snap your fingers as a Director and place a company into Liquidation

Even if you are just closing down a company then ceasing to trade a company to close it down is also a process that can take time and being very involved.

Pre Engagement Checks

Before an Insolvency Practitioner can accept an engagement to act as Liquidator or to take steps to assist a company being placed into Liquidation, they will have to verify the identity of the company Directors and major shareholders.

That will typically require undertaking identity checks to verify the address and identity of the key individuals such as the beneficial owners of the company.

Engagement Letter And Set Up For Voluntary Liquidation

In order to enter a company into Voluntary Liquidation, an engagement needs to be set up with the relevant client company.

That will mean a letter of engagement will need to be entered into which sets out the work the Insolvency Practitioner intends to do to enable the Directors to comply with the legal and regulatory procedures that are required for a company to be placed into Voluntary Liquidation.

Typically a letter of advice will be provided to the Directors to inform them of their obligations such as:

  • Not to accept further credit.
  • Not to make payments to creditors.
  • Not to accept goods that would involve accepting further credit.
  • Not to personally withdraw any further funds from the company.
  • Not to re-use of company name in breach of restrictions in Section 216 of the Insolvency Act 1986.

Notices To Shareholder And Creditors In A Voluntary Liquidation

Notice To Shareholders

Placing a company into Voluntary Liquidation requires the company to hold a formal Meeting of the company in which a resolution can be voted on and passed by shareholders who approve the Liquidation of the Company.

It is not possible to go into Voluntary Liquidation without such a resolution being passed. It is possible to go into Liquidation but not Voluntary Liquidation. If such a resolution is not passed then the form of Liquidation that can be undertaken is instead a Compulsory Liquidation obtained via a Winding Up Order following a winding-up petition.

In addition to the resolution for company Liquidation, given the company is going into Liquidation a Liquidator MUST be appointed. Therefore the shareholders will also need to vote on the appointment of the Liquidator proposed by the company Directors.

Notice To Creditors

If the company is insolvent then notice needs to be provided to creditors who can then consider and potentially vote on the appointment of a Liquidator.

This typically involves either the creditors approving the Liquidator who has been appointed by the shareholders or alternatively it can result in the creditors voting on and appointing a different Liquidator.

The Statement Of Affairs In A Voluntary Liquidation

When a company goes into Voluntary Liquidation the financial position of the company needs to be formally declared to the best possible estimated position.

This is known as the Statement of Affairs which discloses to the shareholders and creditors details of the company’s assets and liabilities. In the case of a Creditors Voluntary Liquidation, details is also provided of each of the creditors and shareholders.

The Report To Creditors In Voluntary Liquidation

In the case of a Creditors Voluntary Liquidation, an extra procedure needs to be complied with. This is a report to creditors that sets out the financial history of the company in recent years and details any recent transactions involving the Directors or owners of the business that might be outside of the normal course of business.

In addition, such a report should have what is called a Deficiency Account. This reconciles the last accounts for the company to the Statement of Affairs deficiency to creditors. It should explain the movements in the last accounts to enable creditors to understand what has caused their losses.

Voluntary Liquidator’s Procedures Upon Appointment

A Liquidator once appointed has a number of procedures that they must comply with after they have been appointed:

  • Notify Companies House of their appointment by filing Form 600.
  • Forward the resolutions for winding up to Companies House.
  • Change the Registered Office to the address usually of the Liquidator by filing Form AD01.
  • File the Statement of Affairs at Companies House (either Form LIQ01 or LIQ02).
  • Gazette Notice of the appointment of Liquidator.
  • Gazette Notice of the resolution of the winding up of the Company.
  • Notify the shareholders and creditors of the appointment of a Liquidator.
  • In a Creditors Voluntary Liquidation, invite creditors to supply details of any concerns, and provide a Proof of Debt form for them to submit details of their claim.
  • Issue notice to HMRC’s VAT Section of the Voluntary Liquidation through form VAT 769.
  • Take out a specific Insolvency Practitioner Bond to protect creditors from the fraud and or dishonesty of the Liquidator.
  • In the case of a Creditors Voluntary Liquidation, set up a case with the Insolvency Service so that a report can be made on the conduct of the Directors under the Company Directors Disqualification Act 1986.
  • Appoint agents to realise any disclosed assets.
  • Disclaim any onerous assets.
  • Collect in the company records from the Directors to enable any investigations to be undertaken.
  • Issue questionnaires to the Directors to assist with any necessary investigations.
  • Consider if any litigation claims that need to be brought to recover assets.
  • Distribute surplus realisations over and above the expenses of the Liquidation to creditors and shareholders pursuant to the statutory order of payment in insolvency proceedings.

Are you a UK company Director?

If you are a Director of a company who wants to find out what is a company Liquidation then Oliver Elliot can help you. We Know Insolvency Inside Out.

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