What is the Difference Between Winding Up and Liquidating a Company?

Winding up vs liquidation

Many people believe that winding up and liquidating a company is basically the same thing but they are actually quite separate steps in the process of closing a company.

The difference between the two are:

Winding up involves ending all business affairs and includes the closure of the company (including liquidation or dissolution).

Liquidation is specifically about selling off company assets in order to pay creditors and then closing the company.

We explain more about winding up and liquidations below as well as some of the other terms you may have come across:

What is voluntary winding up?

Once it has been determined that a company needs to be closed, there are a number of relationships and obligations which must be terminated, these are usually initiated by the company directors, this is a voluntary winding up.

Whether a company is solvent or insolvent, obligations to customers, suppliers and employees must be brought to a close (wound up).

All the company’s affairs are put in order prior to closure (liquidation or dissolution).

What is a winding up petition?

A Winding Up Petition is different to a voluntary winding up, this is a forced procedure when someone is owed money.

A Winding Up Petition is submitted to the court by a creditor of a company who has failed to collect the debts that they are owed. If this petition is granted by the court, the company will then be investigated and liquidated by the Official Receiver.

The Official Receiver will make it their business to conduct a very intrusive investigation into whether any misfeasance or wrongful trading has been conducted.

This is not to be confused with the term ‘winding up’, which many people use to signify the ceasing of their business or trading (see above).

Winding up Petitions – What Are They and How Do You Stop Them?

What is liquidation?

Once all long-term relationships have been severed and obligations have been dealt with, the business’ assets are liquidated (sold) and according to UK law, this must be handled by a licensed insolvency practitioner. Here is where it gets a bit tricky.

If the business is solvent and all debts are satisfied, the proceeds are distributed among members. If the company is insolvent, the top priority is paying off creditors even if there is nothing left to be distributed to members.

Whilst it is true that some of a company’s assets may be liquidated during the winding up stage, it is usual for such things as equipment and the building and/or land to be liquidated once winding up is complete.

Only a professional Insolvency Practitioner (IP) is qualified to liquidate a company’s assets due to the complicated and specific nature of UK law and the variables involved.

Quick Guide to the Limited Company Liquidation Process

UK Law around liquidating a company – be aware

Once you have decided to go ahead with liquidating a company, you need to be aware that there are two main types of voluntary liquidation.

Understanding which one applies to you is extremely important.  The two main types are:

• Members’ Voluntary Liquidation (MVL)

If your company is financially solvent

• Creditors’ Voluntary Liquidation (CVL)

If you are unable to pay your creditors.

Members’ Voluntary Liquidation (MVL)

One of the first steps in liquidating a company is the directors’ resolution. This is of particular importance if a company is seeking a Members Voluntary Liquidation as the directors will be asked to sign a Declaration of Solvency.  Should anything be deemed false on the declaration, the legal consequences can be quite severe.

Utilising the services of a licensed Insolvency Practitioner (IP), the directors can draw up the necessary documents in which they swear that the company is, indeed, solvent and can be expected to have the financial ability to pay debts within a 12 month period of the expected liquidation date.

The Declaration is first sworn in the presence of a solicitor and then filed with Companies House.

Once the directors are believed to have made a full enquiry into the company’s financial affairs and the company is in fact solvent, the first step in winding up a company is to hold a meeting of the board.

After this, there are several steps leading up to liquidation and striking a business off the register.

The process is generally followed as outlined below:

1. Meeting of the Board of Directors to resolve to draw up a Declaration of Solvency
2. Extraordinary General Meeting of shareholders with 14 days notice
3. Liquidator/IP is appointed and will handle statutory filings and notices
4. All taxes are prepared and filed throughout the winding up process through to liquidation
5. Assets are liquidated per schedule
6. Shareholder meeting for the final report

Whilst it is not a legal requirement to appoint an IP prior to liquidating a company, UK law is very specific so it is prudent to consider appointing one for their expertise at this point.

Since the process for winding up a solvent and insolvent company are quite similar, UK law recognises the expertise of Insolvency Practitioners and they are the only professionals allowed to be liquidators.

Creditors’ Voluntary Liquidation (CVL)

If the company is insolvent or the majority of directors cannot agree on a Declaration of Solvency, winding up would utilise a Creditors’ Voluntary Liquidation procedure.

A CVL is quite similar to an MVL in terms of timings, schedule and statutory filings, but the emphasis throughout a CVL is on the creditors.

However, after all the assets have been liquidated and creditors repaid, there may be nothing left to distribute to shareholders.

On occasion, even when the majority of directors have signed the Declaration of Solvency, they may find out later in the process that the company was not in fact solvent.  In a case such as this, MVL would automatically become a CVL.

The main difference being that there must be a meeting with the creditors in a CVL since the company is insolvent and cannot pay off its debts.

Find out more about how a creditors voluntary liquidation is carried out.

Need to talk to someone?

If you are thinking of winding up your company, have any further questions, or you have been issued with a winding up petition, get in touch today.

You can call us on 0800 975 0380 for a free confidential chat where our advisers can explain the various options available to you.