Liquidation is a method using which a company is shut down by redistribution of the assets
in the company. Terms like winding up as well as dissolution are also used to refer to the
process of Liquidation. However, dissolution is generally the last nail in the coffin in the
process of Liquidation. There are three different types of business liquidation: A Creditors’ Voluntary Liquidation, A Members’ Voluntary Liquidation as well as a Compulsory Liquidation. This article aims to explain all the three types of business liquidation and how they differ from each other.
A Creditors’ Voluntary Liquidation (“CVL”)
When the business which are insolvent want to go into liquidation, they usually go through the process of getting a creditors’ voluntary liquidation which is abbreviated as CVL. In a creditors’ voluntary liquidation, all of the owners or shareholders of a business which is insolvent and cannot settle invoices against them can close the business by their own will.
Even if a Creditors’ Voluntary Liquidation is done voluntarily by the owners of the business, the business faces a period of loss if the turnaround of the business does not go as planned. Anyways, even after the fact that getting a Creditors’ Voluntary Liquidation is not the perfect outcome for the company which cannot generate profits and cannot pay their debts, getting a Creditors’ Voluntary Liquidation is the best course of action that such a business can take.
A business like this can get formal bankruptcy charges, for instance, associations and CVAs, which intend to turnaround the fortunes of a business, from time to time a business will be past rescue and the best strategy is to wrap it up by methods for liquidation. This empowers the administrators to continue ahead, and the people who owe money to that organization to recover as much of their money as they possibly can by liquidating the company assets.
A Members Voluntary Liquidation (“MVL”)
When a solvent company which is able to pay all of its debts wishes to go into the process of liquidation, it is called a Members’ Voluntary Liquidation. This type of liquidation is done when the members of the business wish to discontinue the business and liquidate the assets. Here, the shareholders of the company sign up with a voluntary liquidating agency which compiles and handles all of the paperwork and the liquidation of the assets of the company.
During the process of liquidation, the liquidator collects all of the pending invoices from each of the creditors of the company. Then the liquidator verifies the authenticity of the invoices and clears all the valid pending invoices of the creditors. Once all of the debts are cleared, the company starts liquidating its remaining assets. The shareholders are then paid their share of the capital generated through the liquidation process.
The difference between a Members’ Voluntary Liquidation or MVL and a Creditors’ Voluntary Liquidation or CVL is that a Members’ Voluntary Liquidation is done by a solvent company whereas a Creditors’ Voluntary Liquidation is performed by an insolvent organisation. A solvent company is a company which can repay all of its pending debts to the creditors of the company and at the same time distribute principle to the shareholders of the organization.
Whilst a Members Voluntary Liquidation is initiated by the company’s Directors, it still requires 75% of shareholders who have been given notice of the meeting of members to pass the winding up resolution.
When a business cannot pay its creditors, then the creditors of that business can approach the court and force the company into a Compulsory Liquidation. You should know that any kind of creditor who hasn’t been paid by the company can file a petition in the court of law to send a business into a Compulsory Liquidation process. The court will look into the petition and see if the company is capable of paying their outstanding debts. If they deem the company insolvent then the company is forced to go into the process of liquidating their assets for paying their creditors. If the company cannot pay the full amount to the creditors, it is made sure that the creditors get paid the maximum possible amount.
There are three ways a company can enter into the process of liquidating its assets. These three ways are – A Creditors’ Voluntary Liquidation (“CVL”), A Members’ Voluntary Liquidation (“MVL”) and a Compulsory Liquidation. A Creditors’ Voluntary Liquidation is performed by an insolvent organisation that chooses to liquidate its assets. A Members’ Voluntary Liquidation is where the organisation going into the liquidation process is solvent. And finally a compulsory liquidation is done when a court orders an insolvent organisation to liquidate its assets in order to pay their pending debts to a large extent.