Liquidation (or ‘winding up’) is the most common type of corporate insolvency procedure. Liquidation is the formal winding up of a company’s affairs entailing the realisation of its assets and the distribution of the proceeds in a prescribed order of priority.
Liquidation may be either compulsory, when it is instituted by order of the court, or voluntary, when it is instituted by resolution of the shareholders. Voluntary liquidation is the more common of the two. An insolvent voluntary liquidation is known as a ‘creditors’ voluntary liquidation’ because its conduct is primarily under the control of the creditors. A solvent voluntary liquidation is known as a ‘members’ voluntary liquidation’ because its conduct is primarily under the control of its members.
Creditor’s Voluntary Liquidation
Creditors’ voluntary liquidation (or CVL) occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. A CVL is under the effective control of the creditors, who can appoint a liquidator of their choice. The CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency.
Members’ Voluntary Liquidation (solvent companies)
A solvent liquidation is known as a members’ voluntary liquidation (or MVL), in which a liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its debts with 12 months. MVLs may be used for purposes of reorganisation, or in the case of owner-managed businesses to enable the shareholders to realise their interest in the company.
Compulsory liquidation (or compulsory winding up) is instituted by an order made by the court, usually on the petition of a creditor, the company or a shareholder. There are a number of possible reasons for making a winding-up order. The most common is because the company is insolvent. Insolvency is usually established by failure to comply with a statutory demand requiring payment within 21 days, or by execution against the company’s goods being returned unsatisfied. A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.
In a compulsory liquidation the function of liquidator is in most cases initially performed by an official called the official receiver. The official receiver is an officer of the court and a member of the Insolvency Service, an executive agency within the Department of Trade and Industry (DTI). In most compulsory liquidations, the official receiver becomes liquidator immediately on the making of the winding-up order. Where there are significant assets an insolvency practitioner will usually be appointed to act as liquidator in place of the official receiver, either at a meeting of creditors convened for the purpose or directly by the Secretary of State for Trade and Industry. Where an insolvency practitioner is not appointed the official receiver remains liquidator.
Where a compulsory liquidation follows immediately on an administration the court may appoint the former administrator to act as liquidator. In such cases, the official receiver does not become liquidator. An administrator may also subsequently act as liquidator in a creditors’ voluntary liquidation.