Company Liquidation: What Is It?

Businesses all over the UK are having to be liquidated for various reasons. For the process of liquidation to happen, the business must be struggling with cash flow on a constant basis. In usual circumstances, a business in this situation will be being threatened by creditors, and will likely need the help and advice of an appointed liquidator. 

There are multiple reasons why businesses around the UK are beginning to become liquidated, one of which is the dramatic rise in the cost of living. As a result of this, certain businesses are being forced to close as they can not afford to pay for expenditures such as rent, wages and even equipment. 

Larger companies are able to offer staff members that may currently be working for smaller businesses a higher wage for doing the same job, meaning that many businesses are struggling to replace employees on such low wage offerings.

A phrase which is rampantly spreading all over is ‘The Great Resignation’. This term was coined after the large number of people across the world during the pandemic left their jobs, either for a better, higher paying job, or to work on their own side hustle that they may have set up during furlough. 

It was thought by most experts and employers that when the pandemic began to come to an end, that numerous people would come back to employment, but this was not the case. What actually happened was the opposite, the numbers today are still rising. 

With the ongoing ‘Great Resignation’, businesses are finding it increasingly hard to find new staff to help them expand. As a result, more and more are finding themselves having to go through the process of liquidation. 

Why may a business need to be liquidated?

The first reason why liquidation may be needed is due to a market decline, or a vast drop in demand for the service/product. If this happens, the company will simply not be able to make the similar profits they have been producing and will therefore begin to decrease in cash flow. 

Another reason is the loss of regular customers, these customers may have decided they don’t need the product/service anymore or have gone to other competitors for various reasons. 

Extra strain on the business can also be caused through unexpected bills due to the rise in the cost of living. These extra costs could be the breaking point for some businesses which pushes them into liquidation.

The 3 types of liquidation

The first type of liquidation is Creditors’ Voluntary Liquidation (CVL). This type of liquidation only happens when the company is no longer able to pay for any liabilities or continue selling their product or providing a service. For this method to be used, the Director of the business needs to give control over to the liquidator and a vote must be passed through the shareholders. The shareholders vote on the plan they think is best to complete the liquidation of the company. 

The second type of liquidation is Members Voluntary Liquidation (MVL). This liquidation process occurs when the company is still solvent and able to trade, it is just a voluntary choice from the director/s to close down the business. 

The third type of liquidation is Compulsory Liquidation. This form of liquidation is through the courts. This happens when one of the creditors sends in a ‘winding-up petition’ due to a debt not being paid. 

For more information on Company Liquidation, read The Insolvency Expert’s Guide.

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