Liquidation is the process whereby a company is dissolved, its assets sold and distributed to the appropriate parties. There are multiple different types of liquidation, depending on what circumstances the company in question finds itself in.
Working out which kind of liquidation approach is appropriate will include answering basic questions, such as whether the company is liquid or not. In this guide, we spoke to the team at Chamberlain & Co to take a closer look at the details of liquidation. Let’s get into it.
Is the company in question solvent?
The most important question related to liquidation is whether or not the company is solvent. There are some basic tests to ascertain this fact; these include working out if it can pay its liabilities on time, and seeing if the company assets exceed the liabilities.
If the answer to both of these questions is ‘yes’, the company will generally be considered solvent, and a lot more control can be retained in the liquidation process. If the answer is ‘no’, the company is likely insolvent, and a different liquidation process will be necessary.
Solvent liquidation options
There are two main options for solvent liquidations:
- Members Voluntary Liquidation
- Application to be struck off at Companies House
Both are straightforward and should involve few external influences, as the company shouldn’t be indebted to (and therefore liable to) any third parties.
Insolvent liquidation options
There are also two main options when it comes to insolvent companies:
- Compulsory liquidation
Various individuals, such as directors, creditors, or shareholders, can request a compulsory liquidation. They must be able to prove one of the following: that the company owes them more than £750, the majority of shareholders also want the company liquidated, or that it is demonstrable that it is just and equitable to wind up the company.
- Compulsory liquidation by shareholder
This can occur when two shareholders who each own 50% of a company disagree on the future of said company. In this case, it might be that a compulsory liquidation is the only reasonable way of resolving these issues, although it should be considered more of a last resort option.
Voluntary liquidations when insolvent
There are also cases where a company is insolvent and it may be appropriate to opt for a Creditor Voluntary Liquidation, or CVL. This can be an attractive option for directors to take when the affairs of their company require urgent remedial action, for several reasons.
With a voluntary liquidation, directors and shareholders can choose who they wish to act as liquidator, with the approval of creditors of course. The process will likely not have to go to court, resulting in a lower level of public scrutiny than with compulsory liquidations, a positive for the whole process, especially in terms of director reputation.
CVLs are generally also more efficient than compulsory liquidations, being more cost-effective and with fewer legal hiccups. Liquidators appointed in CVLs are generally more experienced than those appointed in compulsory liquidations, resulting in the whole process being overseen in a more highly professional manner.
This article was written by Chamberlain & Co, who are licensed insolvency practitioners and business recovery specialists committed to delivering high-quality service and value to clients in all industries. Contact the Chamberlain & Co team today on 0113 242 0808 or e-mail firstname.lastname@example.org.