There are various types of company liquidation that you can use, but the most suitable option for you depends on your circumstances. In this blog, we’re answering the question, what are the different types of company liquidation?
What are the different types of company liquidation?
Company closure can occur for many reasons, such as the company’s debts, retirement, a lack of cash flow and many more. Before you choose your appointed liquidator, they should be able to help you decide which formal process is suitable for you and your company. Many limited companies will be involved in a general meeting to decipher where any leftover assets and money can be distributed in an orderly manner.
Voluntary liquidation
An insolvent company is one that cannot afford to pay its debts when they fall due or its liabilities are worth more than its assets. If a business has become insolvent and it is unlikely that the company can recover then a director can voluntarily liquidate the company and choose an insolvency practitioner to handle the liquidation of the company.
This method involves the appointment of an insolvency practitioner who will deal with your company’s creditors, formally place the company into liquidation, investigate the director’s conduct, send reports to creditors, and finally close the company by removing it from the Companies House register.
Solvent companies can use something called a member’s voluntary liquidation, or MVL for short, to close down their limited company. This is used by companies that can afford to pay off their debts and still have more than £30,000 left.
Compulsory liquidation
Compulsory liquidation is used by insolvent companies that have been repeatedly chased by creditors for money they owe. As you can tell by the name, the method is forced upon company directors by one of their creditors. This type of liquidation should be avoided at all costs. Unlike a voluntary liquidation, where you can go out and choose the right insolvency practitioner for you, in a compulsory liquidation, the director has no control over which insolvency practitioner they can use.
Creditors’ voluntary liquidation (CVL)
Insolvent companies will typically use the creditors’ voluntary liquidation (CVL) method, which is the most common way to close a limited company. This method involves the appointment of an insolvency practitioner who will communicate with creditors and close the company by removing it from the Companies House register.
Opting for a creditors’ voluntary liquidation will be viewed positively when a limited company enters insolvency. This is because it shows that the company director has adhered to their duties and asked for advice early rather than leaving things until they got worse. It also means that you have minimised further losses to your creditors. In a creditor’s voluntary liquidation, the business assets will likely be sold by the licensed insolvency practitioner to build up funds to pay the company’s creditors.
Members voluntary liquidation (MVL)
Solvent companies can use the members’ voluntary liquidation (MVL) method. This is used by companies that can afford to pay off their debts with a little more time. The liquidator agrees on a time frame with the company’s creditors by which they should receive payment. Then, the company can be successfully closed down.
This solvent liquidation method (members’ voluntary liquidation) can only be used when a company can clear any debts and manage any disputes. As with most other forms of business liquidation, you will need to appoint an insolvency practitioner to help organise your company’s affairs. If you can use this method, it is a tax-efficient way of closing down your limited company.
Compulsory liquidation
Compulsory liquidation is used by insolvent companies that have been repeatedly chased by the creditors for money they owe. As you can tell by the name, the method is forced upon company directors.
The process of compulsory liquidation begins when a company is issued a winding-up petition by an official receiver. This winding-up order will be accompanied by a court date by which the money owed should be paid. If you fail to make the payment by this court date, the company will be wound up, in line with the Insolvency Act.
This type of insolvent liquidation is best avoided where possible, as it can lead to high levels of scrutiny of the company’s directors by the Insolvency Service. Entering compulsory liquidation also means that directors have very little control over the situation, timescale and their company’s assets. When you’ve already been dealing with financial pressure, compulsory liquidation is not what you need.
Strike-off or liquidation
A strike-off can only be used by companies with no outstanding debts. This is the cheapest way to liquidate a company and can be completed without the need for an insolvency practitioner. You should seek professional advice on limited company liquidation before you begin the process.
Not all companies are eligible to use the strike-off method. For example, it cannot be used if you have any outstanding debts or if you have an outstanding bounce-back loan. Those with bounce-back loans will need to look into other types of liquidation, such as insolvent liquidation.
Does liquidation affect my credit rating?
In most cases, liquidation should not affect your personal credit score. However, there are some instances where it may be affected. You should speak to your insolvency practitioner about this and get all liquidation costs and details in writing. Ensure that they have checked for elements such as overdrawn director’s loan accounts before you make any decisions. Remember, Director First helps you understand everything you need to know about your specific situation before you are asked to make any decisions.
Can directors get redundancy pay?
Some directors may be eligible to claim director redundancy pay, depending on how long they have worked within the company and how many hours they worked. This payment is issued by the government and can help many directors who are struggling with how they will be able to pay for their liquidation. If you are ineligible for director redundancy, you will need to assess your other options to pay for company liquidation.
How much does liquidation cost?
Insolvent liquidations typically cost more than solvent liquidations as there is more paperwork involved. All different types of liquidation vary in price for many reasons. Typically, a CVL will cost around £4000 plus VAT. This is for a small liquidation with minimal creditors and few company assets. More complex liquidations will cost more than this, as there is more work involved for the liquidator.
How to liquidate a company
If you’re unsure which method is right for you, you’ll need to seek professional liquidation advice. Company debts play an important role in determining which liquidation process to use. Read our blog on how to close a limited company.
How long does it take to liquidate a company?
You can get a company into liquidation in a matter of weeks. Once the insolvency practitioner is appointed, they have the job of closing the company down and eventually dissolving it from the Companies House register. There is no set time frame for company liquidation. It completely depends on your circumstances and the liquidation process you enter. Most liquidations will be complete within 12 months, but more complex liquidations can take up to 18 months.
What are the different types of liquidation?
- Creditors voluntary liquidation – insolvent liquidation
- Members voluntary liquidation – solvent liquidation that is the most tax-efficient
- Compulsory liquidation – insolvent liquidation
We hope this blog has been useful for you on the different types of liquidation. At Director First, we’re happy to offer advice and answer any questions you may have. Get in touch for all company liquidation advice, from dealing with the company’s creditors to assessing the company’s assets – we’re here to help.
I'm Chris Worden, Managing Director at Director First. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice.
