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Members vs. Creditor’s Voluntary Winding up a Company

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Although commonly referred to as ‘voluntary winding up a company,’ the technical term is actually ‘voluntary liquidation.’

As defined by R3, voluntary liquidation can take on two forms, Creditors’ Voluntary Liquidation and Member’s Voluntary Liquidation. Although the end result is the same, voluntary winding up company operations (liquidation) by the sale of assets to pay off creditors, there are some vital differences inherent in each type.

Members’ Voluntary Winding up A Company (Solvent Liquidation)

Under UK laws for Members’ Voluntary Liquidation, a company must be solvent in the five weeks leading up to the adoption of a voluntary liquidation resolution. The statutory declaration as to the company’s solvency must state that if an inquiry is made into the financial affairs of the business, it will show that there are sufficient assets to pay in full (plus any interest accrued) all of the company’s outstanding debts within a 12 month period. The members (director, owner, shareholders) appoint the liquidator to carry out the voluntary winding up a company during that period. Upon appointing a liquidator or liquidators, the director/board will no longer hold administrative powers as they are now completely in the hands of the liquidator/s. When referred to as a Members’ Voluntary Liquidation, it is often abbreviated and referred to as an MVL.

Creditors’ Voluntary Winding up A Company (Insolvent Liquidation)

Similar to an MVL, a Creditors’ Voluntary Liquidation (CVL) is adopted by a resolution of the director/board whereby the company’s assets will be liquidated to pay off outstanding debts within a period not to exceed 12 months. One of the key differences is that the company cannot prove itself to be solvent. Because of this, the liquidator/s will be appointed by the creditors. Here again, the powers of the director/board will cease and the creditor appointed liquidator will see to the liquidation of any and all assets. After all outstanding debt is paid, if there are any remaining assets or proceeds from the sale of those assets, that amount will be credited back to the members of the now liquidated company.

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