Is your company insolvent and unviable? Liquidation is a process that involves the closure of a company and the sale (liquidation) of its assets in order to raise cash and pay its creditors. The process of liquidation can be initiated either by creditors or by the company’s directors.
There are several different types of liquidation. A creditors’ voluntary liquidation (CVL) is a voluntary liquidation process initiated by a company’s directors. Compulsory liquidation is a liquidation process that begins as a result of legal action against the company by its creditors.
Because liquidation results in the dissolution of a company and the sale of its assets, it’s usually used only by companies that are financially distressed and unlikely or unable to make a financial recovery.
If your company is insolvent or very likely to become insolvent, liquidation may be the best way to end its trading life. Read on to learn how to liquidate a company through voluntary liquidation and compulsory liquidation.
How does liquidation work?
When a company is liquidated, its assets are sold in a liquidation sale. The purpose of the sale is to convert the company’s assets into cash, which is then used to pay creditors. The creditors may be lenders, such as banks or investors, suppliers, contractors and even employees.
In the final stage of both voluntary and compulsory liquidation, the company is dissolved and struck from the register. If the company directors have not followed their duties, they may face charges of wrongful or fraudulent trading and restrictions on their future trading activity.
Are you considering liquidating your company? Below, we’ve listed the two most common forms of liquidation for companies: compulsory liquidation, which is initiated as a result of a creditor’s demand, and voluntary liquidation.
How to liquidate a company through compulsory liquidation
Has your company fallen behind on its payments to creditors? If your company fails to pay its creditors on time, it may receive a statutory payment demand. This is a formal demand that’s the first step in the compulsory liquidation process.
By law, your company must pay its debts within 21 of receiving a statutory demand. If you do not pay the debts within the deadline, the creditor can begin the compulsory liquidation process by issuing a winding up petition for your company.
A winding up petition is a petition to the court to “wind up” (liquidate) your company. If a winding up petition is successful, your company will be subject to a winding up order, which allows the court to appoint a liquidator to begin the process of closing the company and selling its assets.
This is an extremely serious development that results in the closure of the company. It also puts your company’s directors at a significant risk of facing wrongful trading charges for failing to act upon realising that the company was cash flow insolvent. Because the risk of charges is high in a compulsory liquidation, it’s generally not a desirable outcome for many companies.
If your company is facing the threat of being wound up through compulsory liquidation, you may be able to prevent the process from proceeding by speaking to an insolvency practitioner and using a Company Voluntary Arrangement, administration or other insolvency procedure.
How to liquidate a company voluntarily
If your company is insolvent (or potentially insolvent) and you don’t believe it’s viable, you can liquidate the company voluntarily. This process is called a Creditors’ Voluntary Liquidation (CVL) and it is generally a preferable option compared to the risky compulsory liquidation process.
In a CVL, your company’s directors appoint an insolvency practitioner, who will decide that the best course of action is to liquidate the company. The insolvency practitioner will consider all of the other available options (such as a CVA or administration) before deciding on liquidation.
A liquidator will be appointed to sell the company’s assets and the company will be dissolved and removed from the register. Creditors will be paid using the proceeds of the liquidation sale, minus the insolvency practitioner and liquidator’s fees.
Entering into liquidation voluntarily reduces the risk of company directors facing wrongful trading charges. For this reason, it’s a far more preferable option than waiting for a company’s creditors to start the compulsory liquidation process.
Are creditors threatening to liquidate your company?
If your company is under pressure from its creditors, you need to take urgent action to prevent it from being liquidated. Your company may be able to recover through a Company Voluntary Arrangement or alternative insolvency procedure.
There are several options for helping your company recover from insolvency. These include the CVA process, entering into administration, a pre-pack administration sale, emergency financing and cash flow solutions such as invoice factoring and discounting.
If your company is viable, it may be in the interests of your creditors not to liquidate. Speaking to an insolvency practitioner will help you learn more about the options available to your company and the best solution for facilitating a recovery while maximising the interests of its creditors.
Get confidential advice from our expert insolvency practitioners
Are you concerned about your company’s finances? Are you under pressure from creditors to make payments your company can’t afford? You may be able to avoid liquidation by speaking to our expert insolvency practitioners.
We’ve helped hundreds of UK businesses recover after becoming insolvent using procedures such as Company Voluntary Arrangements and administration. Your company may be able to turn around and return to financial stability.
If your company is struggling or insolvent, you need to take immediate action. We can examine your company’s finances and offer actionable, confidential advice regarding recovery options or voluntary liquidation.
We understand that every business is different, and we never apply a one-size-fits-all approach to any insolvent or struggling company. Our team will choose the best option for your company and its creditors, helping you avoid wrongful trading charges or other potential issues.