What is a Liquidation?
There are several types of liquidation, depending on whether or not the company is solvent or insolvent, and depending on the route the company has taken to end up in liquidation. The main terminology is explained below. In all cases, the liquidator appointed must be a Licensed Insolvency Practitioner. Dodd & Co have two licensed insolvency practitioners, Jeanette Brown and Jackie Parsons.
What Is A Compulsory Liquidation?
A compulsory liquidation (also called a compulsory winding-up) is a liquidation ordered by the court. This usually follows the presentation of a petition by a creditor, the company, director(s) or shareholder(s). It is most usual for the petition to be presented by a creditor who is taking action for non-payment of debts. A creditor is generally able to present a petition for winding up if the company owes money and has been through the process of obtaining a statutory demand.
A winding-up petition may also be presented by the Secretary of State for Trade and Industry on the grounds of public interest.
Once a winding up order has been made, the company enters liquidation. The case is then usually referred by the court to the Official Receiver, who is a civil servant and an officer of the court. If the assets of the company are likely to realise sufficient funds to cover the administrative costs, the Official Receiver calls a creditors' meeting to appoint a liquidator other than him or herself. If this is not the case, i.e. in situations where there are no, or minimal assets, the Official Receiver will remain in office. In some cases the Secretary or state may appoint a liquidator immediately, rather than waiting to call a creditors meeting. This will be relevant to protect any assets. Major creditors can influence the appointment of the Liquidator.
Once in liquidation, the directors power's cease, and the Liquidator will commence in their role of winding up the company, and realising assets for the benefit of creditors. This includes carrying out investigations to identify assets, which may include actions against third parties. The liquidator will report annually to creditors on the progress of the liquidation.
Creditor's Voluntary Liquidation (CVL)
A CVL is similar in process, however, the liquidation procedure is initiated voluntarily by the company rather than waiting until a creditor takes winding up action against the company. The directors of the company will have taken advice that the best course of action to protect creditors interests (and their own position), and to minimise future liabilities is to wind up the company. The directors will resolve to do this and then proceed with calling a meeting of shareholders and a meeting of creditors to put this into action.
A CVL requires a resolution by 75% of shareholders. The initial choice of liquidator is proposed by the directors / shareholders, however both the choice of liquidator, and the fee structure is voted on by creditors at the creditors meeting (known as a Section 98 meeting).
Once in liquidation, the procedure is not dissimilar to a compulsory liquidation in that the liquidator controls the winding up, and the collection of assets. The liquidator will also carry out an investigation into the actions of the directors and submit a confidential report to The Insolvency Service to highlight any areas of concern.
Members' Voluntary Liquidation (MVL)
An MVL is the procedure for winding up a company which is solvent. It is so called because the liquidation remains under shareholder control. Reasons for winding up a solvent company include:
- providing an exit route for private company
shareholders to enable them to realise their investment (in a tax efficient manner)
- where a company is dormant or its purposes have
been fulfilled as part of a reorganisation scheme.
The procedure requires a statutory declaration of solvency by a majority of the company directors.
The liquidation commences with a shareholder resolution. Once in liquidation, the winding up is conducted by the liquidator. All creditors are paid in full (including any statutory interest) and any surplus funds are then distributed to shareholders as a capital distribution (rather than income). Many areas of tax planning come into force, including distributing assets in specie (stamp duty considerations), and consideration of the timing of capital distributions.
Although the MVL procedure is only available for solvent companies, the law requires that the liquidator is a Licensed Insolvency Practitioner.
|
