What is Liquidation?
Liquidation is essentially:
- Closing a company or business
- Winding up a company or business
The above are essentially the same thing and the final stage of the process is to dissolve a company or business.
There are three different ways to liquidate or close down a company:
In a compulsory liquidation, a court orders an insolvent business or company to wind up/close down.
It generally comes about after a creditor has taken legal action against the business through a winding up petition.
This form of liquidation means directors lose control of the process – almost all action has to be approved by either the court or the petitioning creditor.
The conduct of the directors will be thoroughly investigated and it is regarded as the least favourable type of liquidation.
Creditors Voluntary Liquidation
In a CVL, an insolvent company chooses to be liquidated in order to resolve its financial difficulties.
As this form of liquidation is voluntary, more options are available to the business, and the process is director-led.
A CVL is generally thought of as a better option than compulsory liquidation as it is easier to control and less costly.
Members Voluntary Liquidation
This is when a company is solvent but chooses to wind up and dissolve.
Reasons for this could include the retirement of directors, a merger or conflicts between directors and shareholders.
An MVL is a tax-efficient way to extract company money from the bank and, when properly managed, it can be a quick and smooth process.