The process of closing down a company is referred to as liquidation. It can be voluntary, where the company itself decides to cease operations, or involuntary, where a court orders the business to close. There are different types of liquidation, each with its specific objectives and procedures. This article will discuss the various kinds of company liquidation that businesses need to know.
Creditors’ Voluntary Liquidation (CVL)
This type of liquidation is voluntary, and it occurs when the company’s directors or shareholders pass a resolution to close the business under the advice of an Insolvency Practitioner, which then proceeds to arrange a meeting with the creditors. The objective of the creditors’ meeting is to appoint a liquidator to oversee the winding up of the company’s affairs, deal with any outstanding debts, and distribute the remaining assets among the creditors. The insolvency practitioner will review the company’s financial affairs and generate a report drafted to creditors, laying out their findings, and each creditor’s rights to claim for debt from the available assets.
Mandatory Liquidation
This type of liquidation is court-ordered, and it occurs when a company is unable to pay its bills, taxes, or debts on time. The creditors will petition the court to declare the business insolvent and appoint an official receiver, and usually, HM Revenue & Customs, to oversee the liquidation process. During this type of liquidation, secured creditors are given priority over unsecured creditors when distributing any remaining assets. The official receiver will investigate the company’s financial affairs, and the court will decide on the best option for closing the business in the most effective way.
Members’ Voluntary Liquidation (MVL)
This type of liquidation is voluntary, and it is used to wind up a solvent company with serious taxation or financial issues that transcend the ordinary payment of operating expenses. During liquidation, the company’s assets are realized to the satisfaction of the outstanding creditors. However, if the company has surplus assets after settling the debts, these assets are returned to the members or shareholders. This type of liquidation is commonly used to redistribute the company’s remaining assets to the shareholders in a tax-efficient way when the directors or shareholders decide to retire, emigrate, or move to another business sector.
Compulsory Liquidation
Compulsory liquidation is a court-led process initiated by creditors, insolvency practitioners, or shareholders. The process is essential when the company is experiencing financial distress, and it is unable to pay its debts, nor can it raise the required capital from its existing customers or shareholders to stay in business. During this type of liquidation, the court will issue a winding-up order, appoint a liquidator, and auction off the company’s assets to repay the creditors.
Phoenixing
Phoenixing is a fraudulent method of liquidating a company, where the directors, shareholders, or owners will arrange to have the company declared insolvent to release any debts owed or liabilities concerning the enterprise. The company will be immediately re-registered under a new name, a new management team, and new share allocations. People who had lost out from the old company are left with unrecoverable debt. Phoenixing also involves the transferring of the old company’s assets to the new venture to generate substantial financial gains. This type of liquidation is illegal and punishable under criminal law, with the possibility of the directors or shareholders being permanently disqualified from managing any company and sometimes facing imprisonment.
Conclusion
There are different types of liquidation, and each has specific objectives and procedures. The common types of liquidation procedures include Creditors’ Voluntary Liquidation (CVL), Members’ Voluntary Liquidation (MVL), Compulsory Liquidation, and Phoenixing. When a company is experiencing debt or financial distress, getting professional advice from an insolvency practitioner can help businesses select an appropriate liquidation procedure to avoid any legal, financial, or taxation implications. Companies must have a broad understanding of the type of liquidation that suits their company and how to proceed during this process. Keep expanding your knowledge of the subject by visiting this external website we’ve handpicked for you. https://companydoctor.co.uk/liquidation/, learn more and uncover new aspects of the topic discussed.
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