Company Liquidation

There are three types of liquidation in Scotland and while there are some similarities between the processes, they remain distinctly different in nature. The most appropriate form of liquidation will depend on a number of factors, including the financial position of the company at the point of liquidation, as well as whether the liquidation is initiated by the company itself or forced into liquidation by order of the courts.

• Creditors’ Voluntary Liquidation (CVL) – This is the most common type of liquidation process and is entered into voluntarily by the directors of an insolvent company. Although the process is voluntary, directors are only likely to consider this option when their company is struggling with financial difficulties so severe that they cannot be successfully turned around. An insolvency practitioner will be appointed to liquidate the assets of the insolvent company and distribute the available funds to creditors. Debt which remains after this point will be written off unless directors have previously provided a personal guarantee to the lender.

• Members’ Voluntary Liquidation (MVL) – A solvent company can be closed using a Members’ Voluntary Liquidation process. It is similar in process to a CVL, however, as an MVL is a process for solvent companies, there will be surplus funds left over after any creditors have been paid which can be distributed to shareholders. This can be a cost-effective way to release funds tied up in the company as it will be treated as capital gains rather than income. Shareholders can also take advantage of Business Asset Disposal Relief when using an MVL which lowers the effective tax rate even further.

• Compulsory Liquidation – Compulsory liquidation is a court-ordered liquidation process which is typically initiated by HMRC or another creditor after their demands for repayment of money owed have been ignored. By forcing a company into liquidation, all assets of the business will be liquidated with the proceeds used to repay outstanding creditors; a creditor will petition for the compulsory liquidation of a company if it believes this is the only way of recovering the money owed to them.

Regardless of which liquidation process is used, an insolvency practitioner will need to be appointed to administer the process. For CVLs and MVLs, the company’s directors/shareholders will be able to choose the insolvency practitioner; with a compulsory liquidation, however, the court will appoint an insolvency practitioner upon the company entering into liquidation. Voluntarily appointing an insolvency practitioner does come with costs; in the vast majority of cases, however, their fees for overseeing the liquidation are taken from the company’s assets.