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UK syllabus: Auditing aspects of insolvency

Liquidation

1.1 Liquidation

Liquidation is the process of terminating a company, thus ending its
life. The assets of the company are physically liquidated, i.e. they are
sold, so that cash can be used to pay off company creditors and equity
holders.

There are two forms of voluntary liquidation (Insolvency Act 1986):

 members' voluntary liquidation

 creditors' voluntary liquidation

1.2 Members’ voluntary liquidation

This is used when a company is solvent (i.e. has assets greater than its liabilities).

Once a resolution has been passed the directors must make a declaration of
solvency stating that they are of the opinion that the company will be able to pay its
debts within twelve months.

The company will then appoint a named insolvency practitioner to act as the
liquidator.

The liquidator will realise the company's assets and distribute the proceeds
accordingly.

Once the liquidation process is complete, the liquidator presents a report at the final
meeting of the members which is then submitted to the registrar of companies.

The company will be dissolved three months later.

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