What is voluntary liquidation?

Thursday, 10 March 2011 10:56

Voluntary liquidation applies to limited companies and is one way in which you can wind up such a business if it is no longer profitable.

Unlike bankruptcy, the decision to take voluntary liquidation will either be made by the directors of the company or by its creditors. There are slightly different procedures depending on the route taken; however, the outcome will be the same.

If the directors of a company decide to enter into voluntary liquidation – which is known as members' voluntary liquidation (MVL) – the business will cease trading and all the creditors and employees will be paid off accordingly.

Before going into voluntary liquidation, all the directors of the board must sign a solvency declaration, which states that the firm will be able to pay all its debts – including any redundancy packages – within 12 months of the start of the winding up process.

Companies that seek bankruptcy help and find they are in a position to do this will usually appoint an insolvency practitioner to deal with all their creditors and ensure that the business is wound up correctly.

The other option is creditors' voluntary liquidation (CVL), which can be brought about by a vote at a general meeting if the business is unable to pay its debts.

Creditors can request that the company is wound up and all its debts paid off. A liquidator – or a liquidation committee – will handle this task, which involves taking control of the company's assets and selling them, before paying back what is owed.

Any remaining money will then be distributed among members of the company.

The main difference between the two types of voluntary liquidation is that with an MVL, the directors must provide a declaration to the effect that the firm's debts can be paid off, whereas with a CVL this statement is not required.

It is important to note that voluntary liquidation is one of the last steps taken after all other attempts to save a business have failed.

Many organisations will try to sell a company or find someone new to take over its management before resorting to voluntary liquidation, but the option is available to firms that wish to avoid bankruptcy.



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