Liquidation is when a company is wound up. The person appointed to carry this out is ‘the liquidator'. There are two types of liquidation: voluntary liquidation and compulsory liquidation.
This can happen in two ways:
members' voluntary liquidation (MVL) – the directors have declared that the company is solvent
creditors' voluntary liquidation (CVL) – the directors have not made a declaration that the company is solvent
MVL happens when the directors have looked into the company's finances and declared that they believe it can pay off its debts in the next 12 months.
CVL happens when a company cannot pay its debts.
An MVL can become a CVL if the liquidator (ie the party appointed to wind up the company’s affairs) decides that the company won’t be able to pay its debts in full in the period stated in the directors’ declaration of solvency. Where this is the case, the liquidator must call a meeting of the creditors which must be held within 28 days. The liquidation becomes a CVL from the date of the meeting.
This is when a company is wound up by order of the court. This order can be made by the Court of Session or Sheriff Court. An order might be made after a creditor applies to the court because the company cannot pay its debts.
There are a number of situations in which a company is deemed not able to pay its debt company, including if:
a creditor is owed more than £750
a creditor presents a written demand in the prescribed form (known as a ‘statutory demand to the company’)
the company fails to pay, secure or agree a settlement of the debt to the creditor’s reasonable satisfaction