When a business closes, its assets, such as intellectual property, vehicles, machinery, and stock are sold in order to generate funds to distribute to creditors. Liquidation can be triggered in different ways, either by voluntary closure of the company, or following a winding up petition which forces the company into compulsory liquidation.

There are three types of liquidation. Two are voluntary, creditors’ voluntary liquidation, where directors of an insolvent company choose to wind it up, and members’ voluntary liquidation, where shareholders of a solvent company decide to close it down. The third is compulsory liquidation, where closure is ordered by the court.

The three types of liquidation

1. CVL (creditors’ voluntary liquidation), actioned by directors when they recognise the company is insolvent.
2. Compulsory liquidation, which occurs following a winding up petition as mentioned.
3. MVL (members’ voluntary liquidation), when a company is solvent, but members choose to close it anyway.

Creditor’s voluntary liquidation

The most common type of liquidation in 2025 (contributing to 77.38% of liquidations) is creditor’s voluntary liquidation, or CVL. As mentioned in the title, a CVL is actioned by the directors of a business who recognise that it is no longer able to pay its debts and so voluntarily decide to wind it up and liquidate the company assets to pay these debts and creditors. This is carried out in order of creditor priority, which begins with the costs and expenses of the liquidation (such as legal and practitioner fees), progressing to preferential creditors (such as employees), then creditors with a floating charge over assets (such as bank lenders), unsecured creditors (such as suppliers and contractors), and finally shareholders who receive any remaining surplus.

In many cases of CVLs, it is unlikely that unsecured creditors and shareholders will receive any remaining monies, due to the company being insolvent and unable to pay existing debts. CVLs are often considered the most appropriate course of action for an insolvent company as it gives directors more control over the timings of the liquidation process compared to compulsory liquidation. By making the decision to place the company into a creditors voluntary liquidation, the directors are showing that they have acted responsibly and taken their legal duties to creditors seriously. Taking the decision in a timely manner also helps to protect directors from potential accusations of wrongful trading (continuing to trade with accumulating unpaid debts).

Compulsory liquidation

In contrast to the voluntary liquidations, compulsory liquidation forces a company to close from the issuing of a winding up petition filed with the court by a creditor or shareholder. Around 15.58% of liquidations were compulsory in 2025, and in these cases, the directors and shareholders have no say on the proceedings of the company closure and liquidation.

Compulsory liquidation typically starts when a creditor formally requests the court to shut down a company because it cannot pay its debts. The company is notified of the winding up petition and given an opportunity to challenge it or resolve the debt with the creditor. If neither happens, the court can grant a winding up order, officially placing the company into compulsory liquidation.

Once the order is placed, directors no longer have any control over the business or its proceedings within the liquidation. An official receiver (government officer) is appointed by the court to take control of the business and liquidate assets. During this process, an official receiver will investigate the company and directors’ affairs, sell off any remaining assets, and distribute the proceeds in the same order of priority as voluntary liquidation. An Insolvency Practitioner may be appointed as liquidator by either the creditors or the Secretary of State to deal with the company, but the official receiver will still continue with their investigations.

The primary difference between compulsory liquidation processes and voluntary, is that directors have far less control. They cannot put forward an insolvency practitioner that will be appointed, any actions taken between the date the creditor petitioned and winding up order will be scrutinized and any assets sales in this period may be voided.
The time it takes for a company to be put into liquidation from the first solicitor’s letters threatening to wind up the company to the winding up order can be three months or more. If employees are involved, they will not be able to make a claim for monies due to them under their employment contracts from the Redundancy Payments Services until the winding up order is made. This delay can cause the employees extreme hardship.

This form of liquidation often carries more scrutiny than a CVL or MVL, as the directors may be seen as having failed to act responsibly in managing the company’s finances, and they will also be investigated by the official receiver to determine any wrongdoing.

Members’ voluntary liquidation

The least common form of liquidation making up just 7.04% of company liquidations in 2025 is the MVL, or member’s voluntary liquidation. In contrast to a CVL or compulsory liquidation, an MVL is conducted when a company is solvent (able to pay debts in full), but the members (shareholders) choose to close it anyway.

There are many reasons why a company may choose to go into liquidation without being insolvent. In some cases, members may be retiring, seeking additional capital for another business entity, or simply no longer wish to run the business. When choosing to close a solvent business, the company directors must submit a declaration of solvency to Companies House which confirms it can and will pay all debts within 12 months of submission. This declaration serves as a promise to creditors that they will be paid in full when the company is closed. If the declaration later proves to be inaccurate and debts cannot be paid, directors can face serious legal consequences.

Once this declaration of solvency is completed, the shareholders pass a resolution to wind up the company and appoint a licensed insolvency practitioner. This practitioner will then, just as they would for a CVL or compulsory liquidation, sell the company’s assets, pay creditors in order of priority, and distribute surplus to shareholders. When distributing the remaining monies, unlike an insolvent company, a solvent company will have surplus to provide to shareholders.

One of the main reasons people choose an MVL over simply closing the company and withdrawing funds as dividends is tax efficiency. Distributions through an MVL can qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), which means shareholders may pay a lower rate of capital gains tax rather than income tax on the money they receive.

What happens once a liquidator is appointed

1. A liquidator (licensed insolvency practitioner) is appointed, and all company trading and activity must stop if it hasn’t already done so. A company may continue to trade briefly if it will maximise the value of assets for creditors (for example completing existing orders).
2. Employees are made redundant through the termination of contracts. Employees can then submit claims to Redundancy Payment Service (RPS) for statutory redundancy, notice pay, and holiday pay.
3. Assets are valued and sold, and outstanding debts are paid and collected, including any VAT, PAYE and Corporation Tax.
4. Creditors are then paid in order of priority and the company is dissolved with Companies House records updated.
5. There are no investigations into the director’s conduct for members voluntary liquidations.

What does an insolvent liquidation mean for directors?

In a limited liability company, a director is not personally liable for any debts the company accumulates (this is known as limited liability protection). However, if they have given any personal guarantees for company debts, then paying these remains the responsibility of the guarantor.

Following liquidation, directors do have a duty to cooperate with the liquidator throughout the process, which includes handing over company records, disclosing information on the company’s finances and dealings, and attending interviews. Compliance with these proceedings is a legal requirement, and failing to do so can lead to legal consequences.

During the liquidation process, the practitioner will investigate the conduct of all of the company directors. This is standard practice and will be conducted regardless of if any directors are suspected of any wrongdoings. If no wrongdoings are found, the liquidator will continue proceedings as per the process above.

In the event the practitioner finds evidence of misconduct by the company directors, such as wrongful or fraudulent trading, they can face personal liability for company debts and face disqualification from acting as a director for up to 15 years. In serious situations such as fraud, criminal prosecutions are possible.

If your company is facing financial difficulties and you’re considering liquidation, it’s important to seek professional advice as early as possible. A licensed insolvency practitioner like Revive Business Recovery can assess your company’s financial position, explain the options available to you, and guide you through the most appropriate course of action.