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Types Of Liquidation

By: Suzie Harris - Updated: 17 May 2011 | comments*Discuss
Liquidation Types Compulsory Voluntary

There are several types of liquidation, creditors’ voluntary liquidation, members’ voluntary liquidation and compulsory liquidation. Below is an outline of all three. If you are thinking about going into liquidation, or are being forced into liquidation, the following explanations will help you to understand the basics of each type.

Voluntary Liquidation

The creditors’ voluntary liquidation happens when the shareholders of a company decide that they want to wind-up a company they hold shares in but the company in doing so can’t pay back all the creditors. This is called being insolvent, not having enough cash in the business. The liquidation will go into force the moment the decision to liquidate has been made and should be carried out by a qualified Insolvency Practitioner.

Members’ Voluntary Liquidation

Essentially, this is the same as the above but with the major difference that the company does have enough money to pay all it’s debts but the shareholders want to close the business down regardless. The company is classed as solvent, meaning they have enough cash to close without owning money.

The hearing for the winding-up order will be held in court and the liquidation carried out by a qualified insolvency practitioner. The directors will have to prove that the company can pay all debts, with interest in certain cases, within a twelve month time frame. The decision to petition the court can be done if some of the directors vote against liquidation provided the vote to liquidate was a majority decision. The decision will be filed at Companies House and the directors will have to prove that they have carried out an in-depth review of the company’s position financially.

Compulsory Liquidation

A court can make a winding-up order forcing a company into Liquidation when petitioned by someone connected with the business. This could be a Creditor who wants paying, or a director of the company. If, however, there is more than one director they will all need to jointly petition the court for a winding-up order as it cannot be done by a single director.

If the petition was placed by a creditor it is normally because despite a statutory demand, the debt has remained unpaid, undisputed or ignored within the legal timeframe of twenty one days. With compulsory liquidation via the creditor there is no cost to the company from the creditor’s actions although their costs will be at the top of the list for payment during the liquidation. The winding-up hearing will take place in court where the order will be made. It can be embarrassing experience for the company directors to be questioned in public.

There are alternatives to liquidation that should be considered before making a decision to liquidate. Some options are pretty much the same routes as individuals can uses to avoid bankruptcy, while others are purely business based. You can:

  • Go into receivership - this gives the company chance to recover and start trading again. This is a viable option for a company that is experiencing temporary cash flow and has orders on the books to cover all its debts. A receiver can free up assets to ride the storm helping the business back onto its feet.
  • Voluntary liquidation - a qualified practitioner will apply to the courts to help a business fold and pay its debts. This avoids the need for a court to compulsorily close a business.
  • Informal arrangement - write to all the company’s creditors and ask for an agreement to be made to enable the business to pay off its debt without the need for legal proceedings. You must indicate how and when you can pay for the creditor to agree.

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