Voluntary liquidation is a legal process that “winds up” an insolvent company by selling assets and property to repay debts. By the end of the voluntary liquidation process, the company will have stopped trading and will cease to exist.
Liquidation is usually considered a last resort — similar to bankruptcy in cases of personal insolvency — and can have advantages, disadvantages and consequences for those involved. However, if your company is unable to pay its debts and other business recovery plans have failed, liquidation may be appropriate and, in such cases, it is important to seek the advice of a qualified solicitor or insolvency practitioner before taking this course of action. UK voluntary liquidation laws vary between countries. Remember that different laws apply in England and Wales, Scotland, and Northern Ireland, resulting in some differences in liquidation practices.
Compulsory liquidation is enforced against a company as the result of a court order that follows a petition by a creditor, with an official receiver or insolvency practitioner appointed to wind up the company’s affairs. Voluntary liquidation, as the name suggests, is a similar process, but one entered into voluntarily. It can take two forms:
Members’ voluntary liquidation — sometimes referred to as “solvent liquidation”, this can occur when the majority of a company’s directors make a statutory declaration that the company is still solvent, which is when assets are sufficient to pay its debts, but the shareholders at a general meeting agree to wind up the company for other reasons.
Creditors’ voluntary liquidation — if the company can be shown to be insolvent or if the majority of directors do not make a statutory declaration of solvency, the firm’s shareholders may vote to allow the company to undergo creditors’ voluntary liquidation. In this case the shareholders must hold a general meeting and successfully pass a resolution for company to be wound up. The company must also call a meeting of all its creditors — which often takes place on the same day as the shareholders’ general meeting — when they will be provided with full details of the company’s financial affairs.
Although the shareholders of a company may nominate a preferred insolvency practitioner to act as the company’s liquidator, ultimately this decision rests with the creditors, who may either accept the shareholders’ nomination, or put forward their own choice of liquidator.
Once the appointed liquidator assumes control of the firm’s affairs, the directors effectively lose any powers to make decisions on behalf of the company. The liquidator is charged with disposing of business assets, pay the expenses and costs of the liquidation, and during this final stage of voluntary liquidation, creditors will have any remaining funds distributed between them.
At the end of the voluntary liquidation, the liquidator will hold final meetings with the company and its creditors, after which the company is finally dissolved and will cease to exist.