It is a common misconception that a company in liquidation must be insolvent.
Our Insolvency Experts explain that whilst quite often it is the case that a company in liquidation is insolvent, it is not always.
Table of Contents
- What is insolvency?
- What types of Liquidation are there?
- What is the difference between an insolvency practitioner and a liquidator?
- What are the benefits of a Liquidation?
- What are the differences between Liquidation and insolvency?
- What do I do if my company is insolvent?
- How do I move forward with a Liquidation?
What is insolvency?
Insolvency means that you are unable to afford to pay your business’s debts as and when they are due; and the total amount owed exceeds the value of the business’s assets.
In simple terms,formal insolvency is effectively a business being bankrupt (as an individual can become).
To find out more on insolvency, read our comprehensive guide: What is Insolvency?
What types of Liquidation are there?
The process of liquidation is primarily geared towards repaying any creditors by liquidating the Company’s assets (if any). There are three different types of liquidation, but your business’s route of liquidation will depend on its current situation.
Not all liquidations, however, are insolvent.
Members Voluntary Liquidations (MVLs) are used where a company, for one reason or another, has come to the end of its useful life but is still solvent.
For example, it could be due to the fact that you want to retire; you want to step down from the family business and nobody else wants to run it, or you simply don’t want to run the business anymore.
In this instance, there is enough value in the remaining assets in order to pay company debts and any creditors.
Creditors Voluntary Liquidation (CVL) takes place when a company has become insolvent and therefore no longer has the funds to pay liabilities or continue trading.
Directors must take CVLs into their own hands, and decide whether to place the company into liquidation, handing over control to a liquidator.
In order to vote for a CVL, shareholders must hold a general meeting to pass a resolution to wind up the company.
What is the difference between an insolvency practitioner and a liquidator?
An Insolvency Practitioner (IP) is a licensed insolvency professional who acts on behalf of individuals and companies that are struggling financially.
Insolvency practitioners can perform various duties, such as attempting to save a business and taking control of it before winding it up.
Insolvency practitioners can take on the role of a liquidator in both solvent and insolvent company liquidations.
As a liquidator, their main role is to release the company of its assets through auction and certify that creditors will receive an appropriate dividend.
- Address claims
- Distribute claims
- Submit Employee claims to the Redundancy Payments Service in respect of Redundancy, Notice Pay and Holiday Pay
- Investigate company transactions
- Report wrongful trading
What are the benefits of a Liquidation?
From a shareholders perspective, there are many benefits to a Members Voluntary Liquidation. It provides a mechanism for distributing funds in a tax efficient manner.
It also provides finality for directors, ensuring that all issues are dealt with and the company dissolved with the oversight of a Licensed Insolvency Practitioner.
What are the differences between Liquidation and insolvency?
Insolvency is when a company is unable to pay its debts as they fall due and the value of the company’s assets is less than the amount of its liabilities.
Insolvency is even possible when the total value of a business’s assets exceeds its liabilities if the Company cannot meet its ongoing cash flow payments. Simply being insolvent does not provide enough grounds for a company’s creditors to petition for bankruptcy or liquidation. There must be a genuine default of an agreed payment or liability.
Liquidation however, is the legal ending of a limited company, which stops a business from trading or employing staff.
Following the completion of a liquidation process, a business will be formally dissolved. This means it will be removed from the official Companies House register which is known as being “struck off”, meaning the business will cease to legally exist.
What do I do if my company is insolvent?
If your company has become insolvent, there are a few steps you can take to mitigate any damage.
It is essential you contact professional insolvency practitioners as soon as possible, as they will help to guide you through the best options for you and your business.
In some cases, you may be able to reach a formal agreement with your creditors which allows you to continue trading.
Alternatively, you may be advised that your best course of action is putting the company into administration, which allows the company to continue trading whilst also selling some assets to pay creditors.
You will also be given the option of liquidating the business if insolvency practitioners do not believe the business can be saved.
How do I move forward with a Liquidation?
If you are concerned that your business is in financial distress and heading for potential insolvency, it is arguably even more important to seek the advice of an Insolvency Practitioner.
Directors could find themselves personally liable if they have not taken the steps deemed necessary to fulfil their responsibilities as directors.
It is imperative you seek professional advice immediately. Contact our expert team at The Insolvency Experts for advice on any matter related to liquidation or insolvency.