Limited companies are liquidated or wound up every day. Put simply this means that companies, typically those experiencing financial difficulties, are brought to an end, which means they will cease trading, will no longer employ people and the company’s assets will be liquidated to repay creditors. Once the company is struck off the companies register at Companies House, it will cease to exist.

What is insolvency?

Liquidation is a formal insolvency procedure that typically goes hand in hand with companies that are experiencing financial difficulties. Corporate insolvency is established by a licensed insolvency practitioner using two established tests – the cash flow test and the balance sheet test.

The cash flow test examines whether the company can pay its liabilities as and when they fall due. Here, the insolvency practitioner will take a look at the company’s current financial obligations and any that will be due in the short term. If the company is unable to meet the daily costs of running the company, it is essentially insolvent, and directors must act quickly and seek professional advice on how to rescue their company before it is too late.

In contrast, the balance sheet test aims to clarify whether the company has more assets or liabilities. The test takes a closer look at the company’s assets, including stock, debtor book, cash and property vehicles and machinery. These assets are placed against any company debts, such as bank loans or other finance providers, HMRC, employees, suppliers, among others to establish whether the company is solvent.

Types of liquidation

By contacting a licensed insolvency practitioner, company directors will be informed of the options that are available to them. These may range from invoice factoring to proposing a voluntary liquidation.

There are three main types of liquidation:

A director can propose that the company stops trading and be liquidated if it is struggling to pay its debts and the majority of shareholders are in agreement.

Creditors’ voluntary liquidation (CVL)

A director can propose that the company stops trading and be liquidated if it is struggling to pay its debts and the majority of shareholders are in agreement.

Compulsory liquidation

The beleaguered company can’t pay its debts and a creditor, for instance, HMRC applies to the courts via a winding up petition to liquidate it as a last resort to get paid.T

Members Voluntary Liquidation

Another form of liquidation is a members’ voluntary liquidation. However, this option is only available to companies that are solvent or in other words are able to pay their debts, but directors still want to voluntarily liquidate the company or close it and move on to pastures new.

Voluntary Liquidation Offers Certain Advantages

Although liquidation may not appear to be a step forward, when company directors are under constant pressure from irate creditors and have been threatened with legal action by HMRC, voluntary liquidation offers a number of benefits compared with compulsory liquidation by the tax authority or an unsecured creditor. For instance, they will  have control over the outcome, they will avoid legal action and the possibility of personal liability for company debts due to wrongful trading is also minimised.

Post liquidation

After the company has been closed, the liquidator is required to investigate the actions taken by the company’s directors while the company was trading solvent. If he or she is able to demonstrate that the directors failed to act in the best interests of creditors, they may be accused of ‘wrongful trading’. Any director found guilty of this could be banned from being a director for up to 15 years after the liquidation of the company.

Once the company has been liquidated, creditors repaid and debts settled as far as possible, any remaining debts are written off. If no signs of ‘wrongful trading’ have emerged, directors are free to move on to another company or into employment.

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