Liquidation

Liquidation in the UK is the legal process by which a limited company stops trading and ceases to exist. Employees are made redundant. Any assets are used to pay off outstanding company debts and fees. A director or owner is not made to pay what the company can’t pay.

Liquidation | Solvent Liquidation | Insolvent Liquidation

 To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’ 

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company. 

Solvent liquidation is the liquidation of a company that is solvent. Which means that it can pay its debts on time and in full. There might also be profits inside the company. If this applies to your company, it can be liquidated through a formal process called a Members’ Voluntary Liquidation (MVL).  

Insolvent liquidation is the liquidation of a company that is insolvent. Which means that it can’t pay its debts on time and in full, now or in the future. While it might have assets like stock or premises, it needs to liquidate these to turn them into cash to be able to afford to pay its debts. This can be done using a Creditors’ Voluntary Liquidation (CVL).  

Beyond this, the difference between solvent and insolvent liquidation lies in the practical steps taken by the licensed insolvency practitioner closing the business.  

Liquidation | Insolvent Liquidation | Solvent Liquidation

 To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’ 

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company. 

Solvent liquidation is the liquidation of a company that is solvent. Which means that it can pay its debts on time and in full. There might also be profits inside the company. If this applies to your company, it can be liquidated through a formal process called a Members’ Voluntary Liquidation (MVL).  

Insolvent liquidation is the liquidation of a company that is insolvent. Which means that it can’t pay its debts on time and in full, now or in the future. While it might have assets like stock or premises, it needs to liquidate these to turn them into cash to be able to afford to pay its debts. This can be done using a Creditors’ Voluntary Liquidation (CVL).  

Beyond this, the difference between solvent and insolvent liquidation lies in the practical steps taken by the licensed insolvency practitioner closing the business.  

Liquidation | Insolvent Liquidation | Solvent Liquidation

 To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’ 

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company. 

Solvent liquidation is the liquidation of a company that is solvent. Which means that it can pay its debts on time and in full. There might also be profits inside the company. If this applies to your company, it can be liquidated through a formal process called a Members’ Voluntary Liquidation (MVL).  

Insolvent liquidation is the liquidation of a company that is insolvent. Which means that it can’t pay its debts on time and in full, now or in the future. While it might have assets like stock or premises, it needs to liquidate these to turn them into cash to be able to afford to pay its debts. This can be done using a Creditors’ Voluntary Liquidation (CVL).  

Beyond this, the difference between solvent and insolvent liquidation lies in the practical steps taken by the licensed insolvency practitioner closing the business.  

What’s the difference between solvent and insolvent liquidation?

To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company.

Solvent liquidation is the liquidation of a company that is solvent. Which means that it can pay its debts on time and in full. There might also be profits inside the company. If this applies to your company, it can be liquidated through a formal process called a Members’ Voluntary Liquidation (MVL).  

Insolvent liquidation is the liquidation of a company that is insolvent. Which means that it can’t pay its debts on time and in full, now or in the future. While it might have assets like stock or premises, it needs to liquidate these to turn them into cash to be able to afford to pay its debts. This can be done using a Creditors’ Voluntary Liquidation (CVL).  

What are the advantages and disadvantages of insolvent liquidation?

Facing insolvency is a difficult and often stressful time for business owners and company directors. But believe it or not, there are benefits of insolvent liquidation. We explore them for you below and look at why these benefits of insolvent liquidation might make it the right choice for you.

What are the benefits of insolvent liquidation?

STOP creditors pressuring you for payments

Winding up a company

Winding up a company, in its simplest form, means to stop trading, liquidate your assets and close your limited company, striking off the company from the register at Companies House. Winding up a company is also known as liquidating a company.

When you wind up a company, you use the assets released from the company to pay any debts that it has. If there’s any funds left from these payments, this money goes to the company’s shareholders.  

Compulsory Liquidation

Compulsory Liquidation is the forced liquidation of an insolvent company by the courts. It happens in cases where, because a company cannot pay its debts, one or more of its creditors request through a winding up petition that the courts enforce the liquidation (or winding up) of the company’s assets to repay the money owed. If the courts agree with the creditors, they will grant a winding up order and appoint an Official Receiver to handle the liquidation.

What are the circumstances of Compulsory Liquidation?

The first stages.

Compulsory Liquidation is usually the last resort for creditors and has been preceded by other attempts to get payment of the outstanding money. In fact, the winding up order will not be granted if the creditors cannot prove that they have made previous, unsuccessful efforts to recover the debt. This proof is usually in the form of threatening letters, county court summons, county court judgement and bailiff action.

A company’s biggest creditor is often HMRC. As they have huge power and gravitas behind them, it’s imperative that you do try to pay them the tax money you owe. If you cannot pay the money you owe to HMRC, you should tell them before your payment is due. They have a dedicated Time to Pay resource which you can use to negotiate more favourable payment terms, if you are struggling with your business finances.

In some cases, you might also be able to negotiate payments with other creditors, either through an informal agreement or a formal insolvency procedure like a Company Voluntary Arrangement (CVA). If you have tried all these avenues then the next stage is to take more serious action.

An alternative option to Compulsory Liquidation

If you’ve been issued with demands for payment, as we talked about above, the next step for your creditors is to issue the threat of a winding up petition. Before this happens, or even when you receive this threat, you have the power to stop it using a Creditor’s Voluntary Liquidation or CVL.

A CVL is a formal insolvency process which requires the involvement of a licensed insolvency practitioner from the very beginning. You’ll need to stop trading. Then we’ll take control of your company, arrange for the sale or your assets and pay your creditors back with the proceeds. The company will then be closed. A CVL pre-empts any legal action by your creditors and allows you to avoid the circumstances of Compulsory Liquidation by closing your insolvent business on your own terms.

The reasons a Creditors’ Voluntary Liquidation is required (CVL) 

If your business is insolvent and there seems to be no way out of your financial situation, a CVL could be the answer. It can help you escape the pressure from creditors and extract the most amount of money from your business for you to pay back your debts. As your licensed insolvency practitioner, we’ll do all the legwork and paperwork for you too.  

Speak to our experts to see if a CVL is right for you.  

So…what are the reasons a Creditors’ Voluntary Liquidation is required in business insolvency? 

Your business doesn’t have enough money coming in 

It’s quite normal for your business’ income to change throughout the year, especially if your trade relies on seasonal demand. But if you don’t have enough money saved to see you through the quiet periods, this is when you could run into trouble.  

If poor cash flow is the cause of your insolvency, the reasons a Creditors’ Voluntary Liquidation is required is to stop any more debts building up, to liquidate your assets and to pay back your outstanding debts. In some cases, we can use a Start Afresh Liquidation to reopen your business and save your company name. Speak to our experts to see if this could be an option for you. 

Bad financial planning 

You might have a good amount of money coming into your business. But if you haven’t prepared for any changes in demand, the timings of your outgoing payments or late payment of invoices, you could still find yourself in an insolvent position. As a result, you might find yourself with disgruntled creditors demanding payments that you simply cannot make.  

The reasons a Creditors’ Voluntary Liquidation is required in this situation is to stop the hassle from your creditors and destress the whole situation. Because a CVL is used to liquidate your company’s assets and pay back creditors, this is usually enough to stop them from pursuing you for the debt.   

You’ve been putting your own funds into the business 

Unfortunately it’s not uncommon for a director or owner to put personal money into the company to cover any shortcomings. As well as causing potential tax and credit issues, this puts a real strain on your personal funds.  

It’s extremely difficult to make the decision to close your company after you’ve put your personal money into making it work. But there has to be a point where you stop.  

One of the reasons a Creditors’ Voluntary Liquidation is required here is to extract any money the company has, in the form of its assets, and pay back the debts you’ve been trying to cover yourself. This in turn removes the immense strain this situation can cause.  

The reasons a Members’ Voluntary Liquidation is required 

A Members’ Voluntary Liquidation (MVL) is the liquidation of a solvent company. ‘Solvent’ means that your company has no problem paying its debts in full and on time. You most likely also have profits in your company.  

If you’re looking to close your business and it’s solvent, an MVL could be the fastest and most profitable way to close your business. These are the reasons a Members’ Voluntary Liquidation is required. 

To take advantage of tax benefits.  

If you’ve retained profits in your company that total more than £25,000, the reasons a Members’ Voluntary Liquidation is required are to take advantage of Business Asset Disposal Relief (which used to be called Entrepreneur’s Relief) and reduce your Capital Gains Tax. 

Here’s how it works: 

When you close your company, you’re able to distribute funds below £25,000 as capital. For amounts above that, you have to pay Capital Gains Tax. But…if you liquidate using an MVL you can distribute up to £1,000,000 and pay just 10% in tax.  

To save money and time  

If your company has been dormant for sometime and you don’t intend on using it again, the reasons a Members’ Voluntary Liquidation is required are to save you money on accountancy fees or remove the hassle of doing your own annual confirmation statement and set of accounts. Plus an MVL will extract any profits from your company so you could be much better off as a result. 

A solvent liquidation can occur when a company needs to be closed for reasons other than insolvency. Example of the reasons to liquidate a solvent company include:

it was created to meet short-term demand or to fulfil a contract that’s now finished.  

it’s been dormant.

the director or owner is closing to take employment with another company.

To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company.

If your business is insolvent and there seems to be no way out of your financial situation, a CVL could be the answer. It can help you escape the pressure from creditors and extract the most amount of money from your business for you to pay back your debts. As your licensed insolvency practitioner, we’ll do all the legwork and paperwork for you too.  

Speak to our experts to see if a CVL is right for you.