Although many people assume that company liquidation is only applicable to those that are insolvent, this is not always the case.

Liquidation is a process which can apply to  both solvent and insolvent companies. In some cases it is very obvious and clear whether your business is solvent or insolvent but for many businesses, especially small businesses, they can hover between being solvent and insolvent for many months or longer. See below and also here for more on the factors which decide solvency or insolvency.

So, if you are not sure about solvency or not, the first thing to determine is whether your business is solvent and insolvent because the consequences and options are very different between solvent and insolvent liquidations.

Some of the main differences between solvent or insolvent liquidations are :

  • with insolvent liquidation the priority is to safeguard the interests of  creditors, whereas with solvent liquidations whilst creditors must be paid, after that shareholders interests are the priority
  • With solvent liquidations, the business owners retain some control of the process  With an insolvency situation, the directors and shareholders must step aside completely and there will be an investigation by the appointed Insolvency Practitioner as to whether the company has been lawfully run in financial terms in the period leading up to liquidation.
  • Insolvent liquidations of limited companies may trigger personal liabilities for the directors and/or shareholders if personal guarantees have been given for company borrowings or where the directors have acted unlawfully.
  • The process, timing and costs associated with solvent liquidations is completely different from insolvent liquidations.

We are specialists in all types of company liquidations. We have a team of advisors to help small business clients decide on what is the best available option and we also have experienced licensed Insolvency Practitioners to deal with liquidations.

Or you could read our specific pages about each subject:

Do You Want to Voluntarily Liquidate an Insolvent Company?

Do You Want to Liquidate a Solvent Company?

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Whether your company is profitable, or you have reached the point of insolvency, our team of licensed experts is here to help you make the best of our situation. Please call us, or use the live chat for a free consultation.

Solvent Insolvent Liquidation

What’s the Definition of Insolvent Liquidation?

The definition of insolvent is when a company cannot pay its creditors, or when its assets exceed its liabilities. There are three different tests to decide if a company is insolvent, as covered by Section 123 of the Insolvency Act 1986:

The Cash Flow Test – Can the company pay its debts when they fall due?
The Balance Sheet Test – Does the company own more than it owes i.e. are the company’s assets exceeded by its liabilities?
The Legal Action Test – Has a creditor taken legal action like a County Court Judgement (CCJ) against the company?

What are Some of the Common Causes of Liquidation?

Companies can become insolvent for a number of reasons. In certain cases, the blame for insolvency could be levelled at a company director, in which case they could face a misconduct charge and a directorship ban. They could also be made personally liable for some of the company’s debts. However, there are also a number of ways a company can become insolvent without any fault on the part of the company directors. This includes:

• Late payments from customers
• A major customer or supplier enters a formal insolvency
• A significant dip in the market
• An increase in competition
• The incorrect pricing of goods

All of these events can impact negatively on a company, and may ultimately result in it having to enter a liquidation process if no other alternatives, like a company voluntary arrangement (agreed payment plan with creditors), are available.

Why Choose Voluntary Insolvent Liquidation?

In the case of an insolvent company, entering into a voluntary liquidation means the directors are trying to minimise the risk to creditors, which in an insolvency situation is the right thing to do. Choosing a creditors’ voluntary liquidation can ensure all loose ends are tied up and the directors can have a clean break without being chased by their creditors.

Creditors’ Voluntary Liquidation (CVL)

A CVL is a voluntary liquidation process which is initiated by company shareholders with the intention of closing the company and selling its assets to repay its creditors (if funds are available at the end of the process). An insolvency practitioner will have to be appointed to manage the liquidation, but as the process is voluntary, rather than court led, the company directors can decide who the insolvency practitioner will be. The company directors will also have the chance to purchase assets and the goodwill of the business as part of a company rescue process.

Solvent Liquidations

A solvent company is one whose assets exceed its liabilities and one that can pay its creditors in full, within 12 months of a debt falling due. However, just because a company is financially viable, that does not necessarily mean it will continue to trade. In some circumstances, the company directors might choose to liquidate the company. This includes:

• The company may have plenty of assets, such as property, vehicles, stock etc. but the company has no future use or purpose;
• The shareholders and directors of the company would like to retire and transfer assets and cash to themselves personally;
• The directors may want to realise the assets and cash tied up in the company and not have anything more to do with the business in future;
• The directors may want to start afresh with a new company and get what they can out of the old one beforehand.

Solvent Liquidation is known as Members Voluntary Liquidation

A members’ voluntary liquidation (MVL) is the formal liquidation process used to close down the affairs of a solvent company. This type of liquidation should be used to extract the cash or assets from the business in a tax efficient manner to be divided between shareholders and directors. It is the most tax efficient method of taking realisable assets such as property, vehicles or stock out of a company.

How can we help?

We can act for you in Creditors’ Voluntary Liquidations (CVL) and Members’ Voluntary Liquidations (MVL). We put the provisions in place to extract company cash or assets in the case of an MVL, and provide the expert guidance you need to navigate the legal minefield of a CVL.