Class: B.Com (Prog) Semester III
Subject : BCP 3.3 CORPORATE ACCOUNTING
Topic: Liquidation of Companies: Meaning and types.
Liquidation the process of bringing a business to an end and distributing its assets to claimants. It
is an event that usually occurs when a company is insolvent, meaning it cannot pay its
obligations when they are due.
Liquidating a company refers to the procedure in which a limited company is brought to a
close by an appointed Insolvency Practitioner (Liquidator).
The company’s assets are then sold (liquidated) and any realisation of revenue is
redistributed in order of priority.
The company is struck-off the registrar of companies and this is known as dissolution,
which is the final stage of the liquidation process.
The term liquidation in finance and economics is the process of bringing a business to an
end and distributing its assets to claimants.
A bankrupt business is no longer in existence once the liquidation process is complete.
Liquidation can also refer to the process of selling off inventory, usually at steep
1.2: Types of Liquidation:
There are two voluntary liquidation procedures and one compulsory procedure.
|||The voluntary procedures
Creditors Voluntary Liquidation
Members Voluntary Liquidation are initiated by the shareholders and
The compulsory procedure is usually initiated by creditors like HMRC via a court
1.3: Voluntary Liquidation of an Insolvent Limited Company with Debts
A Creditors’ Voluntary Liquidation (CVL) used by insolvent companies and is initiated by a
shareholders’ resolution. It involves the dissolution of the insolvent company and the
redistribution of the company’s assets to the creditors. This procedure enables directors to
write off unsecured limited company debts that are not personally guaranteed.
Directors may see voluntary liquidation as a welcome and safe exit from a stressful
situation; whilst addressing all of the creditors, appropriately.
If the limited company has liabilities that it cannot afford to pay and you would like to move
on without the stress of the company’s debts hanging over your head, this type of business
liquidation may be an appropriate option.
Although it should be seen as a last resort, liquidating a company via this route can be
considered a rational decision and it may not necessarily mean the end of business.
1.4: Voluntary Liquidation of a Solvent Company
A Member’s Voluntary Liquidation (MVL) is the appropriate way to liquidate a solvent UK
company and can be used as part of an exit strategy.
An MVL may be considered if you have a solvent company that you want to close as part of
your business plan and reduce taxation. Your company may have outlived its purpose and be
heading towards a natural end of trading, or you may wish to extract the value of cash and
assets from the company in a tax efficient manner.
For an MVL, the directors must sign a declaration stating that there are no remaining
creditors. One example of a creditor could be tax arrears with HMRC for VAT or PAYE, so
this need to be considered before going into liquidation.
1.5: Compulsory Liquidation
Compulsory liquidations are usually initiated by a creditor that is looking to force a
company into closure via a court order application. The process is usually instigated with a
winding up petition and once it is heard at court, it can become a winding up order.
This procedure is often used to wind up your business as a last resort by disgruntled
creditors after failed negotiations over missed payments. This insolvency procedure is
usually handled by the Official Receiver, or an appointed Insolvency Practitioner.
Therefore, this is not a voluntary process for directors.
The conduct of the directors is reported back to the Secretary of State at the end of the
liquidation proceedings and failure to cooperate with the Official Receiver can have serious
If you cannot pay the creditor and do not act immediately the situation can escalate quickly.
Do not ignore any threat in the form of a winding up petition, as the intention is to
forcefully liquidate your company.
1.6: What is the Process of Liquidating a Company?
The details of the process when voluntarily liquidating a limited company depend largely on
the type of liquidation that is chosen. However, the five basic steps below are included
within all of the procedures:
1. An Insolvency Practitioner is appointed as Liquidator.
2. The company’s assets are then assessed and realised (liquidated).
3. If there are any creditors they are then paid in order of priority.
4. Surplus cash is distributed to the shareholders.
5. The company is finally dissolved and struck-off the registrar of companies