Solvent vs Insolvent Company Liquidation
Although many people assume that business liquidation is only applicable to those that are officially insolvent, this is not always the case. Liquidation is a process which works for both solvent and insolvent companies, with the principle difference being that the proceeds of insolvent liquidation go to creditors.
In this article, we’re going to explore the essential definitions of solvent and insolvent liquidations and take a look at a few of the reasons why a company might decide that either a creditors’ voluntary liquidation (voluntary insolvent liquidation) or a members’ voluntary liquidation (solvent liquidation) is the right option for them.
Or you could read our specific pages about each subject:
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.
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.
For a confidential, no-obligation discussion of your circumstances, please get in touch today or call 08000 746 757.