Insolvent Liquidation: What are your options?

May 25, 2021 / Business Insolvency

A company that is insolvent is one that can no longer cover its daily costs or pay back its debts.

Unfortunately, some insolvent companies cannot feasibly recover and restore profitability, in which case liquidation is the best option.

If you are the director of an insolvent company and you considering liquidating your company, there are two main types you need to be aware of – Creditors’ Voluntary Liquidation (CVL) and Compulsory liquidation.

Although these both end in a company being liquidated and dissolved, they are very different processes that have different processes, advantages and drawbacks.

To help directors understand what their options are when it comes to insolvent liquidation, Clarke Bell have put together a guide to insolvent liquidation options help you get on the right track.

Insolvent Liquidation Options Explained

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When is a company deemed insolvent?

There are two main tests that can determine if your company is insolvent, these include:

  • The cash-flow test: if a company can no longer pay its bills and cover its day-to-day costs, then it can be deemed insolvent
  • The balance sheet test: If your company has more liabilities than assets, it can also be deemed insolvent

What is insolvent liquidation?

Liquidation refers the process of liquidating and dissolving a company. This is a formal legal process and must be carried out by a licensed Insolvency Practitioner.

This is a process that assessed the company’s assets and liabilities, redistributing them to the shareholders and creditors of the company, as applicable.

As we have mentioned, there are two main types of insolvent liquidation, Creditors’ Voluntary Liquidation and Compulsory liquidation.

What is compulsory liquidation?

Compulsory liquidation is when a company is forced into liquidation by creditors who are owed money. With this type of liquidation, the business director will have almost no control over the process.

Creditors must be owed a sum of £750 or more and must have had repayment demands gone unfulfilled over 21 days. If this is the case, creditors can issue a winding-up petition to the court asking them to wind-up and liquidate the company in order to retrieve money they are owed.

Once a winding-up petition has been issued, it will be served to the company and advertised 7 working days later in The Gazette. It is then heard at court where it will either be approved or dismissed.

If the winding-up petition is approved, a winding-up order is then made and served to the company.

It is worth bearing in mind that amidst the COVID-19 pandemic the rules on winding-up petitions have been temporarily changed, with the government recently stating that no winding-up petition can be issued to a company that has been forced to close due to the pandemic until 31st March 2021.

As it sounds, this is the most serious form of insolvent liquidation and can have a variety of negative impacts on a director.

To find out more about what to do if you have been issued a winding-up petition and what your options are, check out our comprehensive guide.

Creditors’ Voluntary Liquidation

The other form of liquidation open to insolvent companies is Creditors’ Voluntary Liquidation.

Unlike compulsory liquidation, this is a completely voluntary process initiated by the company directors.

CVL occurs when a company is no longer sustainable and is insolvent. It is a way for the company director to take control of the situation and act before things get worse. Often, if the director fails to act they may end up being forced into compulsory liquidation.

As a formal insolvency process, a licensed Insolvency Practitioner must be appointed to carry out and oversee the process. Unlike in the case of compulsory liquidation, the company director will be free to choose which Insolvency Practitioner they use.

There are several advantages to the CVL route. One main benefit is that it shows that the director is taking ownership and displaying that they acknowledge their legal duties to creditors. This helps to safeguard the director’s reputation as well as helping avoid any risk of wrongful trading.

With this route, the director is also free to open a company in the future if they wish.

Finally, by taking control of the situation, the director can avoid being forced into compulsory liquidation.

Find out more about voluntary liquidation here.

What about options for business recovery?

If your insolvent business has real chances of turning around and restoring profitability, a different set of options will be open to you.

These include:

  • Company Voluntary Arrangement (CVA) a CVA is an option open to insolvent companies looking for business rescue. This option allows the company to come to an agreement with creditors over the repayment of its debts and settle these debts over a fixed period meaning they can continue trading. As the name suggests, this is a completely voluntary process and must be made in agreement with creditors who are owed money. What’s more, it must be approved by a licensed Insolvency Practitioner who genuinely believes the company can be rescued.
  • Administration: this is another route for insolvent businesses looking to restore profitability. Administration can help rescue a business by protecting it and its assets from claimants during a process of restructuring. Whilst in administration, a company is protected against any legal action being taken against it for 8 – 10 weeks. An administrator, or Insolvency Practitioner, will be appointed to oversee the company’s operations and draw up a plan for recovery which must be approved by the majority of the company’s creditors.

If your business is struggling find out how Clarke Bell can help

We hope you have found our guide to insolvent liquidation options useful. If your business if facing financial hardship, it’s always better to act quickly. This could help you avoid being served with a winding-up petition and being forced into compulsory liquidation.

Where possible, it is always better for a director to take control of their insolvent company and enter into Creditors’ Voluntary Liquidation.

If you think a CVL is the best next step for you, let Clarke Bell help. Our team of experts have years of experience working with insolvent companies. We will always get the best possible outcome for you. Get in touch and see how we can help you today.