Insolvent liquidation is the process of dissolving a company and using the value of its assets to pay creditors. There are two kinds of liquidation, compulsory and voluntary.
Compulsory:If a business is unable to pay back its debts, its creditors may choose to apply for a winding up petition. If their application is successful and the debt cannot be paid before the court date, the company’s accounts may be frozen as the court issues a winding up order and any assets are liquidated.
Voluntary:Creditor’s voluntary liquidation is when a director and shareholders agree a company cannot afford to pay back its debts and should move to wind up the business. After this resolution an appointed liquidator will take control of the company and oversee the liquidation process.
(For voluntary liquidation of solvent companies see Solvent Exits).
Solvent Exits (MVL)
If a company is solvent but, for whatever reason, wishes to cease trading and liquidate its assets, a Member’s Voluntary Liquidation is the most appropriate path to take.
Once a declaration has been made and an insolvency practitioner has been appointed as liquidator, they will take control of winding-up the company as quickly and cost-effectively as possible.
The main benefit of MVL other than minimising the time and cost of closing a business, is reduced tax liabilities. Capital gained from liquidation is taxed more favorably than dividends, by using this service you simplify the process, while maximising value.
Bankruptcy is an option many people consider when unable to pay their debts, but it is a serious process that has a long-lasting effect on your financial affairs and your ability to secure credit.
Alternatives to bankruptcy include debt management plans that allow you to agree an affordable repayment schedule, a debt relief order (DRO) if you owe less than £15,000 and an individual voluntary arrangement (IVA). An IVA involves negotiations with creditors to pay back some or all of your debts over an agreed period of time.
When entering administration, control of the company will be placed in the hands of an appointed insolvency practitioner who will make decisions that are in the best interests of all stakeholders. They will attempt to find a solution to the company’s debt problems or find a buyer for the business.
Administration is a powerful procedure and is typically taken when pressure from creditors is too great for a business to run properly. It does however provide protection against legal action, halt the deterioration of the company’s finances and doesn’t have to be a lengthy or expensive process.
In most cases the outcome of administration will either be a CVA (Company Voluntary Arrangement), which sees the company return to solvency having negotiated with creditors or the sale of the company and its assets. The most efficient method of sale being a Pre-Pack Administration.
A pre-pack administration involves agreeing the sale of an insolvent company’s assets before entering administration. Not only does this save time, but also reduces the stresses put on a business by a lengthy administrative process.
The process may involve selling the assets to current owners or finding a third party who is willing to buy the business, depending on what is the most appropriate course of action.
A pre-pack not only minimises the damage done to the goodwill or reputation of the business by restructuring as quickly and smoothly as possible, but also provides the best chance of saving jobs and rescuing a business that has the potential to succeed.
Company Voluntary Arrangement
Sometimes the pressure of debt and being chased by creditors can lead to an otherwise viable business being unable to survive.
Usually the best result for all parties is for a company to keep trading and find a way to turn the business around. This avoids the difficulties that come with liquidation or administration and avoids the loss of jobs and equity.
A CVA allows you to retain control of the business and gives you the breathing room necessary to concentrate on restructuring or refinancing the business, in order to get things back on track.
With the agreement of creditors a deal can be reached that allows a company to pay back some or all of its debts over a certain period of time, without the stress of legal threats or more serious insolvency procedures.