What Are the 3 Types of Liquidation in the UK?

There’s a lot of talk out there of companies experiencing trouble at the moment.

But what is liquidation? Sometimes it’s something that you don’t consider until it happens to you. Simply put, liquidation is a process that occurs when a company is unable to pay its debts. As a result of this they are forced to cease its operations.

Essentially, there are three primary types of liquidation: compulsory liquidation, voluntary liquidation, and creditors’ voluntary liquidation. Understanding these types is crucial for business owners.

Additionally, exploring methods to avoid liquidation altogether can help companies maintain their financial stability and continue to thrive. If you think you are seeing warning signs then get in touch with an insolvency practitioner as soon as possible.

So what are the three types?

Liquidations fall into two groups, compulsory and voluntary which we explore further below.

Compulsory liquidation:

Compulsory liquidation occurs when a company’s creditors, directors, or the court file a winding-up petition against the company. This situation arises when the company fails to meet its financial obligations, such as paying debts or resolving creditor disputes.

To liquidate a company, the court appoints an official receiver or a liquidator to manage the company’s assets. They then distribute the proceeds among the creditors. The goal of compulsory liquidation is to bring a swift and orderly end to the company’s affairs.

Voluntary liquidation:

The remaining two are voluntary liquidations. Voluntary liquidation, as the name suggests, is initiated voluntarily by the company’s shareholders or directors. There are two types of voluntary liquidation in the UK: members’ voluntary liquidation (MVL) and creditors’ voluntary liquidation (CVL).

Members’ voluntary liquidation (MVL):

An MVL is the process chosen when a solvent company decides to wind up its operations and distribute its assets among shareholders.

This typically occurs when business owners want to retire or move on to new ventures. In MVL, the directors make a statutory declaration of solvency. This confirms that the company will be able to pay its debts, including interest, within 12 months. A liquidator is then appointed to oversee the distribution of assets to the shareholders.

Creditors’ voluntary liquidation (CVL):

A CVL is initiated when a company is insolvent and cannot pay its debts. In this case, the directors, with the support of the shareholders, decide to wind up the company. A CVL enables the company to be dissolved in an orderly manner while maximising returns for creditors.

The appointed liquidator takes control of the company’s assets and distributes them to the creditors in a prescribed order of priority.

How do you avoid liquidation altogether?

While liquidation can be an unfortunate and distressing situation, there are measures businesses can take. Here are some strategies to help steer clear of liquidation:

a) Implement strong financial management practices:

Maintain accurate and up-to-date financial records, including regular cash flow analysis, budgeting, and financial forecasting. This will enable early identification of potential issues and facilitate proactive decision-making.

b) Monitor and control costs:

Regularly review and control expenses to ensure they align with revenue streams. Implement cost-cutting measures, negotiate favourable terms with suppliers, and explore opportunities for efficiency improvements.

c) Diversify revenue streams:

Relying heavily on a single customer or market segment can leave a business vulnerable. Diversify your customer base and expand into new markets to reduce dependency and mitigate risks.

d) Maintain healthy cash flow:

Maintaining positive cash flow is crucial for the financial stability of any business. Implement effective credit control procedures, offer incentives for prompt payments, and consider alternative financing options when necessary.

e) Seek professional advice:

Consulting with financial advisors, accountants, and business consultants can provide valuable insights and guidance on managing financial challenges. They can help identify potential pitfalls and propose strategies to overcome them.

Conclusion

There are a lot of ways you can make changes at early stages to head off any serious financial stress. Acting early and shoring up any elements that aren’t working can be invaluable.

Understanding the three types of liquidation in the UK is vital for business owners and creditors alike. By recognising the signs of financial distress and taking proactive measures, companies can avoid reaching a point where liquidation becomes inevitable.

By prioritising financial health and taking pre-emptive action, companies can avoid the unfortunate circumstances associated with liquidation. In this way they can continue to thrive in the long run.

Need some more advice? Get in touch with us today.