There are two types of company liquidation – Voluntary and Compulsory. Compulsory is where the company is wound up by court action and should be avoided where possible. It would usually be a creditor of the business who has filed a winding up order to court. The court has to decide whether to grant the winding up order.
Voluntary liquidation, as the name suggests, is voluntary. Whilst most voluntary liquidations are when the company cannot pay its creditors a voluntary liquidation can also be made for the owners of the business to realise the assets over a period of time, with no shortfall to any creditors .e.g retirement circumstances, please also see MVL (members voluntary liquidation).
Administration can be a constructive way of preserving a company’s business or achieving a better return for creditors than a liquidation. A licensed insolvency practitioner is appointed as administrator on the petition of either the company, the directors or one or more of the company creditors.
Administration immediately offers protection to the business from creditors. During this time the company is protected from creditor action while a long term solution can be sought. Options can include:
Refinancing of the business
Sale of the business to new owners
Splitting the business into saleable divisions
A Corporate Voluntary Arrangement is where there is an agreement with your creditors to allow you to keep control of your company and continue trading. It is the obvious choice if trying to avoid liquidation.
This type of arrangement is literally an agreement with your creditors and what amounts they can expect to get paid in the future. Obviously it has to be agreed between the company and its creditors, at least 75% of the creditors must be in agreement.
A Members Voluntary Liquidation (MVL) Arrangement is a process of unlocking the assets in your business. Unlike insolvent businesses your business will be solvent and this is a method of enabling the shareholders of the business to have a tax efficient return of their investment. The benefits are mainly tax related where the distribution of funds to shareholders is treated as capital rather than income, plus this can enable entrepreneurs relief where applicable.
This is quite typical where directors may wish to retire or when the business does not see a continued future before it may become insolvent.
Winding Up Petition
Even if you believe you might receive a winding up petition rather than actually received one then action is needed urgently.
A winding up petition is made by the courts to literally wind up your company, usually because you have defaulted on payment to a creditor.
Statutory Demand Order
A 21 day statutory demand order is a formal demand for payment of a debt. If the debt is not settled with the supplier or HMRC within 21 days they can ask the court for a winding up order against your business or a bankruptcy order if it is your own name as an individual.