Voluntary Liquidation

Voluntary Liquidation is the process by which the directors of a company, with the assistance of a licensed insolvency practitioner, choose to put the company into liquidation, (also known as winding up).

This is to be contrasted with a Compulsory Liquidation (sometimes called Company Bankruptcy), which is a method by which a creditor issues a petition through the Court to force the company to be wound up.

There are two kinds of Voluntary Liquidation:

1. Members Voluntary Liquidation (MVL)
   When the directors of a company believe that the company is solvent but they no longer wish for the company to trade.
2. Creditors Voluntary Liquidation (CVL)
   The directors and or shareholders decide to put the company into liquidation due to the fact it is insolvent.

1.  Members Voluntary Liquidation (MVL)

What is Members Voluntary Liquidation?

A Members Voluntary Liquidation can take place when the directors of a company believe that the company is solvent but they no longer wish for the company to trade. This may be because the owner director is to retire and prefers to liquidate the company and its assets rather than sell.

When is a Members Voluntary Liquidation Appropriate?

If the company has sufficient assets to be able to pay all of its creditors in full (together with all costs) the liquidation is referred to as a solvent liquidation, or Members Voluntary Liquidation.

How is a Members Voluntary Liquidation Undertaken?

The company directors must make a statutory declaration that they believe the company will be able to pay its debts in full within 12 months from the start of the voluntary winding up.

The statutory declaration will state that the directors have made a full inquiry into the company's affairs. The declaration will include a statement of the company's assets and liabilities as at the latest practicable date before making the declaration.

The liquidation starts when the members, in general meeting, pass a resolution (usually a special resolution) to wind up the company voluntarily.

Notice of the special resolution for voluntary winding up of the company must be published in the Gazette within 14 days of the general meeting. The company must also send a copy of the declaration and the special resolution to the Registrar within 15 days of the general meeting.

Can a Members Voluntary Liquidation be converted into a Creditors Voluntary Liquidation?

Yes. If the liquidator decides that the company will not be able to pay its debts in full in the period stated in the directors' statutory declaration of solvency, he or she must call a meeting of the creditors which must be held within 28 days. The liquidation becomes a CVL from the date of the meeting.

What happens to employees in a Members Voluntary Liquidation?

All employees are subject to the employment contracts will be served redundancy notice a minimum one month before the liquidation. The company will cover all the statutory payments and fees in accordance with the employment law.
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2.  Creditors Voluntary Liquidation (CVL)

What is a Creditors Voluntary Liquidation?

A company may go into Creditors Voluntary Liquidation when it cannot pay its debts. The directors and or shareholders decide to put the company into liquidation due to the fact it is insolvent. In doing this a licensed Insolvency Practitioner is appointed as the Liquidator of the company whose prime duty is to collect in the assets of the company and distribute them to the company’s creditors.

The Liquidator will also look into the conduct of the company directors to ensure that they have acted properly.

When is Creditors Voluntary Liquidation Appropriate?

With creditors voluntary liquidation the company will cease to trade, the assets are realised and employees dismissed. Where it may be possible to trade out of the situation, other insolvency procedures such as Company Voluntary Arrangement or Administration may be more appropriate.

It is for this reason that directors should seek advice from a licensed Insolvency Practitioner who can guide them through the options. Creditors voluntary liquidation will be appropriate where:

• The company is insolvent (can’t pay its debts as and when they fall due);
• The company’s business is no longer viable;
• The directors are not prepared to continue to trade the company;

How is a Creditors Voluntary Liquidation Undertaken?

To undertake a Creditors Voluntary Liquidation, the company must pass a special resolution to say that it cannot continue in business because of its liabilities and that it is advisable to wind up.

The resolution must be advertised in the Gazette and in two newspapers in the area where the company has its principal place of business within 14 days. It must also be sent to the Registrar within 15 days. A meeting of creditors must be held in the next 14 days after passing the resolution. Notice of the meeting must be sent to the creditors at least 7 days before the meeting. Also, the directors must prepare a statement of affairs for consideration at the meeting, and appoint one of themselves to attend and preside over the meeting.

What will happen in a Creditors Voluntary Liquidation?

A liquidator will be appointed by either the Directors or the Creditors of the company. The directors must provide him or her with a statement of the company’s affairs and must co-operate fully with the liquidator.

Within 14 days of being appointed, a liquidator must publish a notice of appointment in the Gazette and notify the Registrar. If the liquidation is voluntary, the liquidator must also give notice in a newspaper in the area where the company has its principal place of business.

The Liquidator will start to wind up the company's affairs. They will do this by selling all the company's assets and distributing them to its creditors. If anything is left over, the liquidator distributes it among the shareholders of the company.

What happens when the company's affairs are fully wound up?

The liquidator presents an account of the affairs of the company and how assets have been distributed to a final meeting of the creditors and members of the company. He or she must advertise the meeting in the Gazette at least one month before it is held.

Within one week of the meeting having taken place, the liquidator must send the account to the Registrar and a return of the final meeting. Unless the court makes an order deferring the dissolution of the company, it is dissolved 3 months after the return and account are registered at Companies House.

What happens to employees in a Creditors Voluntary Liquidation?

As the purpose of the liquidator is to wind up the company the most likely outcome is that the liquidator will terminate employment contracts on or shortly after his appointment.

The question is if employees are owed money (i.e. wages due) will they be paid? Certain amounts are recoverable from the National Insurance Fund (NIF), but these payments are very limited. Employees, who are owed more than they are able to claim from NIF, will rank as preferential creditors, which means they will be paid after payment of the insolvency's expenses but subject to a maximum of £800. Any balance owed will be treated as unsecured debt in the same way as the company's trade creditors, and it is unlikely that employees will recover more than a small proportion of what they are owed.

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What will Liquidation cost?

Cooper Matthews will provide an initial consultation free of charge. In most cases this will include a review of the business to establish the current financial status of the business and possible solutions.

Where it is decided to proceed with one solution or another Cooper Matthews will receive fees. However, these will normally be deducted from the standard payments made by the company as part of the arrangement it enters into. As such, it is rare that directors will have to find additional money which is not already available within the business to pay fees.

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