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Liquidation is a procedure through which the assets of a company are realised and distributed to creditors in satisfaction of the debt that they are owed, and in the order of priority as set out in the Insolvency Act 1986. Following the end of liquidation, the company is dissolved. Liquidation is also referred to as winding up and the terms are often used interchangeably. 

A company can be wound up using either compulsory liquidation or voluntary liquidation. 

Compulsory liquidation  

Compulsory liquidation (also known as compulsory winding up) is a court-based procedure through which the assets of a company are realised to satisfy the company's debts and liabilities as far as is possible. There is no freeze on the enforcement of security but there is a stay on the commencement or continuation of proceedings against the company without the leave of the court.

The procedures starts with the presentation of a winding-up petition at court. The court will schedule a hearing and the petitioner must serve and advertise the petition amongst other steps. The court can appoint a provisional liquidator in the period between the petition issue and hearing in order to preserve the assets of the company, and accordingly can direct the powers available to fulfil this. At the hearing, a judge will decide whether it is appropriate to make a winding-up order. The court has discretion to make a winding-up order, or dismiss or adjourn the petition. 

If a winding-up order is made, the winding up is then deemed to commence from the date that the petition for winding up was presented (effectively, the order has retrospective effect). 

Once a winding-up order has been made, the Official Receiver is initially appointed as liquidator until and unless the company's creditors appoint their own liquidator.

Voluntary Liquidation 

There are two forms of voluntary liquidation: members' voluntary liquidation (MVL) and creditors' voluntary liquidation  (CVL). 

The distinction between an MVL and CVL lies with whether the directors have made a statutory declaration of solvency stating that the company will be able to pay its debts in full, with interest, within a specific period not exceeding 12 months from the commencement of the liquidation. This is a crucial step to placing a company into MVL and is why it is referred to as "solvent liquidation. 

In contrast, where the directors do not make such a declaration, the winding up is a CVL Unsecured creditors have an interest in a CVL as, unlike an MVL, they may not be paid the debts owed to them in full, where there are insufficient assets available. Therefore, they are involved in the appointment of a liquidator and are entitled to receive reports on the progress of the liquidation. Accordingly, the liquidator has a duty to act in the best interest of the creditors.

If you are a business needing help in this area, please get in touch immediately so that we can assist.

Call Grimsby 01472 240 251, Louth 01507 600 610, Barton on 01652 632215 or Scunthorpe 01724 847 888.