What Does it Mean to Liquidate Assets?
It’s not uncommon to hear the phrase “the assets are being liquidated” in news stories about the financial failure of a company or even in a personal insolvency case. But what does that mean?
If a business is in financial difficulty and cannot pay its bills then there a number of options available to it. It could seek additional funding from investors or attempt to raise money from traditional and alternative finance streams like bank loans and invoice finance.
Alternatively, the business owner could choose to sell a business asset that’s not essential to the running of the company to provide an injection of working capital so it can continue to trade. The act of selling that asset and turning it into cash is called ‘liquidating’ the asset.
What Happens if the Business is Insolvent?
When a business becomes insolvent, i.e. it is unable to pay its debts when they become due, it is legally obliged to act in the best interests of its creditors (parties it owes money to). If there is no impending payment due and the business has no real hope of returning to solvency then it cannot continue to trade. Instead, the directors of the business should seek the advice of an insolvency expert.
At this point, it might be decided that the best way to maximise the return for the company’s creditors is to close the business down and liquidate its assets in a process called ‘liquidation’. In this case, an insolvency practitioner will be appointed to value the business’s assets and sell them to raise money that will be used to repay the business’s debts.
The assets can include everything from plant and machinery to property, vehicles and fixtures and fittings. Any money left after the creditors have been repaid will be distributed to the shareholders.
The Three Liquidation Processes in the UK
There are three different types of liquidation in the UK. That includes:
- Compulsory Liquidation – This occurs when the creditors of an insolvent company force the business into liquidation so their debts can be repaid.
- Creditors’ Voluntary Liquidation (CVL) – When the directors of an insolvent business voluntarily enter into liquidation in the best interests of their creditors.
- Members’ Voluntary Liquidation (MVL) – When the directors of a solvent business voluntarily enter into liquidation because they no longer want to run the business.
What Happens when Assets are Liquidated in Insolvency?
The method used by the insolvency practitioner to liquidate the assets of a business can differ depending on a number of factors. That includes the type of assets involved, the urgency with which the funds are needed and the type of liquidation process the company has entered into.
If there’s no particular rush for the assets to be realised then they will usually be sold for a higher price on the open market. However, it may be that an auction is more appropriate for specialist assets or if the funds are needed more urgently. Whatever the method of sale, the assets will always be professionally valued to get the best possible return for the creditors.
The Different Categories of Creditor
An insolvent business can owe money to a number of different parties. That may include suppliers of the business, lenders like banks and other financial institutions, HMRC and even the business’s employees. Once the assets have been sold, the monies that are raised will be distributed to these creditors in a prescribed order as below:
- Secured creditors with a fixed charge
- Preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
Once the liquidation process is complete, a final report is sent to the creditors which details the assets that have been sold, the price they were sold for and how those funds were distributed. It will also include details of the liquidator’s costs and fees.
The Sale of Assets in a Members’ Voluntary Liquidation
What makes a members’ voluntary liquidation (MVL) different is the fact that the business is not insolvent. Instead, the owners or directors no longer want to run the business, perhaps because they are retiring, so choose to close it down.
In an MVL, the business’s assets are liquidated in the same way as an insolvent liquidation and an insolvency practitioner is appointed to administer the process. If there are any creditors to repay then they will receive their funds first and the rest of the money will be distributed among the members (shareholders).
Need Advice on Liquidating Assets?
Whether you’d like to know more about liquidating assets or want to discuss the liquidation process in more detail, we are on hand to help. We’ll explain your options and make sure you understand the implications of each procedure for you and your business. Get in touch for your free, no-obligation consultation today.