Liquidation, or dissolution is the procedure for concluding the affairs of a company which is no longer required, or which cannot continue by reason of its insolvency. The assets of the company are realised and the proceeds are distributed. The company’s liabilities must be paid first, any remaining surplus will then be distributed to the shareholders. If the assets are insufficient to pay the company’s liabilities in full, the company is insolvent so creditors will only be able to receive part payment.
Following the conclusion of its liquidation, a company is dissolved – ie: its name is removed from the register of companies and it ceases to exist.
There are three types of winding up:
- Members’ voluntary winding up
- Creditors’ voluntary winding up
- Winding up by the court
Members’ voluntary winding up
This is only available where the directors are able to make a formal declaration that the company can pay all its liabilities in full within 12 months. The company is solvent, but may no longer be required for one (or more) of a number of reasons including:
- it may have been formed for the purpose of undertaking a particular project which has now been completed;
- it may be redundant following a group restructuring; or
- the owner-manager may be retiring.
The company is placed in voluntary winding up by resolution of the shareholders who, at the same time, appoint a liquidator. If for reason, a liquidator is not appointed by the general meeting, the directors shall apply to the Court for the appointment of a liquidator.
Creditors’ voluntary winding up
This is where a company is unable to continue in business by reason of its liabilities or where, for any reason, the directors are unable to make a declaration of solvency before the start of the winding up. As for a members’ voluntary winding up, the company is placed in winding up by resolution of the shareholders, who also appoint a liquidator. However, a meeting of creditors must also be held at which the creditors can, if they wish, replace the liquidator appointed by the shareholders with one of their own choice. Where no person is nominated to act as a liquidator by either the creditors or the company, an application to the Court for the appointment of a liquidator shall be made by the director of the company.
Winding up by the court
This is imposed by a court order following an application by the shareholders or the directors or by the creditors. A public officer is appointed to act as Official Receiver for the purpose of carrying out the necessary investigations and subsequently reporting to court as to the amount of issued and paid up share capital, and the estimated assets and liabilities if the company is insolvent, the causes of the failure whether further investigations are necessary with regards to any matter relating to the promotion, formation or failure of the company or the conduct of the business.
The Official Receiver may make further reports to the Court if in his opinion any fraud has been committed by any person or officer of the company. The Official Receiver automatically becomes the liquidator and continues in office until the creditors appoint another person as liquidator. It is generally desirable for the directors of an insolvent company to initiate a voluntary winding up before the position deteriorates to the point where a compulsory winding up occurs.