Liquidation – an option for a company in debt

Liquidation

Company Liquidation is the process of selling an insolvent business assets and dividing them up between creditors to pay off debts. It can either be voluntary or compulsory.

Voluntary Liquidation

Voluntary liquidation is initiated for a number of reasons. Sometimes a company may elect to enter liquidation while they are still solvent and their assets are still worth more than their liabilities but they believe that the company is past the point of no return and will no longer be financially viable. More commonly however it happens when the business is insolvent and directors decide to put the business into liquidation.

There are two types of Voluntary Liquidation:

• Members Voluntary Liquidation (MVL).
• Creditors Voluntary Liquidation (CVL).

Compulsory Liquidation

A compulsory liquidation occurs when a court makes an order to wind up the company. This can result in a petition from creditors after they have sent the company a statutory demand and the company is unable or unwilling to pay. A court-appointed receiver is charged with analysing the company’s assets and determining the best way to distribute them between creditors.

Advantages of Liquidation:

If you are considering liquidation, it is important that you are aware of the pros and cons, and that the process is the best solution for your current situation. The advantages of liquidation are:

• It happens to the company, not the individuals within the company.
• Management of the liquidation is passed onto the appointed liquidator, relieving some of the stress that a director may incur as a result of the process.
• Once the company is liquidated, creditors can no longer pursue directors for payment.
• Unsecured debts are written off.
• As soon as the company closes, all legal action against the company is halted.

The Liquidator

The liquidator must be a qualified practitioner and is responsible to collect the company’s assets and distribute them to the company’s creditors, and in the event of a surplus, to the members. The liquidator is required to notify the Gazette (the London Gazette – the official newspaper of record for the UK – it records official, regulatory and legal information) and Registrar of their appointment within 14 days. If the liquidation is voluntary, notice to the local newspaper is also standard practice. Additionally, in the case of a voluntary liquidation, the liquidator has the power to continue the running of the business (if feasible) to ensure a beneficial winding up of the company.

What happens next?

After the company’s affairs have been fully wound up, the liquidator is required to present an account to the final meetings of the creditors and members, and also advertise the meetings in the Gazette at least a month before they take place. Within one week of the meeting, the liquidator must also send the account to the registrar as well as a return of the final meeting.

What is the difference between voluntary and compulsory liquidation?

A company that is facing insurmountable debt and financial strain may find itself facing either a compulsory or voluntary liquidation, depending on their individual circumstances. In some cases, a solvent company will have no choice but to enter liquidation as a result of a court order, or they may enter the process voluntarily.

A voluntary liquidation requires the directors of a business (along with the permission of the shareholders) to make a formal decision to liquidate the company and distribute the assets amongst creditors. Depending on whether or not the company is solvent, they will enter into either an MVL (Members Voluntary Liquidation) or CVL (Creditors Voluntary Liquidation). A liquidator will be appointed for both procedures. With an MVL, the company will declare itself as solvent, and the company assets are then valued and sold to pay creditors. A CVL is also used voluntarily, but only when a company is insolvent, involving an investigation by the liquidator.

A compulsory liquidation occurs when a creditor petitions the courts and the court decides to issue the indebted company with a winding up order. The directors are then able to make an appeal within a certain time period. This approach can prove costly for creditors and directors alike, so it is recommended that all alternatives are considered before being led into a compulsory liquidation.

If you are considering liquidation or want to know if it is the best solution for your business debt, please call us as soon as possible