Liquidation - Voluntary Liquidation

Voluntary Liquidation

Voluntary liquidation occurs when the members of the company resolve to voluntarily wind-up the affairs of the company and dissolve. Voluntary liquidation begins when the company passes the resolution, and the company will generally cease to carry on business at that time (if it has not done so already). If the company is solvent, and the members have made a statutory declaration of solvency, the liquidation will proceed as a members' voluntary winding-up. In such case, the general meeting will appoint the liquidator(s). If not, the liquidation will proceed as a creditor's voluntary winding-up, and a meeting of creditors will be called, to which the directors must report on the company's affairs. Where a voluntary liquidation proceeds by way of creditor's voluntary liquidation, a liquidation committee may be appointed.

Where a voluntary winding-up of a company has begun, a compulsory liquidation order is still possible, but the petitioning contributory would need to satisfy the court that a voluntary liquidation would prejudice the contributories.

In addition, the term liquidation is sometimes used when a company wishes to divest itself of some of its assets. This is used, for instance, when a retail establishment wishes to close stores. They will sell to a company that specializes in store liquidation instead of attempting to run a store closure sale themselves.

Since 1 March 2012, changes in tax legislation (specifically the removal of ESC C16) have meant Members Voluntary Liquidations (MVLs) can be a tax efficient method of shareholders extracting funds from a redundant company. If a company's assets exceed £25,000, upon strike off any distributions would be taxed on the shareholders as dividends, whereas via an MVL distributions would be treated as capital gains receipts. Because of this legislative change, the demand for cheap MVLs has increased significantly.