To liquidate a company is to formally wind up its affairs – trade ceases, assets are realised and the liabilities quantified. If there are sufficient assets to pay all of the company debts, interest on debts and costs within a twelve month period the company is solvent. In this situation, it is the members (i.e. the company shareholders) that control the liquidation process. This process is therefore called a Members Voluntary Liquidation.
There are many reasons why directors may wish to wind a company up in these circumstances;
- the loss of a major contract and a realisation that it will not be replaced.
- the retirement of the sole director.
- a disagreement between the directors/shareholders whereby they can part company in an orderly way and the procedure is overseen by a professional.
- completion of a project for which the company was set up.
- tax planning issues.
Taking professional advice and assessing the financial position of the company reasonably accurately is vital before a final decision is made. To commence the procedure the directors need to swear (i.e. before a solicitor) a 'declaration of solvency'. In practice, the declaration of solvency will have been prepared by an Insolvency Practitioner. It will also be necessary for there to be a shareholders' meeting whereby at least 75 per cent of the members resolve that the company be wound up and a liquidator appointed. Because all the creditors will be paid through this procedure there is not a creditors' meeting.
Should it become clear during the winding up process that all the debts may not be paid a creditors' meeting would be called and effectively the control of the process would pass to the creditors. A statement of affairs would be presented to the creditors and a liquidator appointed.
Duties of the Liquidator
- to maximise the realisation of the assets.
- to bring and defend legal proceedings.
- to agree creditor claims and to pay dividends to the company creditors within 12 months.
- to pay dividends to the company shareholders.
