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In this situation, it is likely that the company will enter a Creditors Voluntary Liquidation (CVL) to wind up the business and out the interests of those who are owed money first. Unlike with a Members Voluntary Liquidation (MVL) where the directors keep control of the company, during a CVL, company directors have to give control of their business to a liquidator who will manage the closure.
Once the company is handed over by the director, the liquidator and creditors have a duty to investigate company finances in an attempt to discover the reasons behind the business’ failure. This is often a heart-wrenching procedure for the company director as they must hand over their business, accept they are unfit to run it and then be told where they went wrong. But there will be little time for sympathy from staff, suppliers and other creditors who rely on the insolvency practitioner to use the company’s assets to pay the debts.
Interestingly, a company director still has the chance to take the business forward even if he no longer has control as there is no law against him/her starting up a new company and bidding for the liquidated company’s assets. In fact, many who do take this route, called ‘pheonixing’, agree a deal with the liquidators before the sale.
For those companies that have no money worries but have opted for liquidation, a different route must be taken. For example, say the director of a family business is to retire and no relatives want to take over the company. In such a case the company could enter a Members Voluntary Liquidation (MVL), which would wrap up the business up within the bounds of the law.
Both CVL and MVL situations are voluntary but a company can also face compulsory liquidation if a creditor has petitioned court as a result of repeatedly missed payments. To prevent small debts from leading to such a process, a compulsory liquidation order is usually only implemented in cases where a company owes more than £700. In either a compulsory or voluntary liquidation a company must cease conducting business or face legal action for irresponsible and wrongful trading.
