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Liquidation is a process of winding a business or a company by selling its assets in order to pay the desired amount to creditors and shareholders. There may be many reasons behind the liquidation of a company, major ones being the company has liabilities more than the assets of the directors want to shut down the company due to several other reasons. Also, a company is liquidated because the business has come to an end with all debts being paid, and the directors and employees will move towards new careers or will simply retire.
There are two main types of liquidations, solvent liquidation and insolvent liquidation.
What happens during solvent liquidation?
Solvent liquidation generally involves the retirement of a director or maybe closure process that is chosen by the director if he/she thinks that the business is left with no potential to manage the challenges of future and cannot do business according to the current required needs and terms.
Reasons why solvent liquidation takes place-
- Generational change is one such reason for voluntary or solvent liquidation. There are companies that were established with children as shareholders or unitholders in the trust, and it is quite possible that the future generation may not share the same vision. Therefore, the tax-effective Members’ Voluntary Liquidation helps the future generation to carry on their own visions.
- Risk management is another factor that influences the liquidation process. There is a possibility that a company may undertake an enterprise successfully and may even sell all its investment invariably if any unforeseen liabilities occur in future.
- The directors or shareholders may want to invest or start in a new company and thus want to take out cash beforehand from the old one.
What happens after solvent business liquidation?
Selling the assets
Assets are often sold to third parties and other competitors. However, in some cases, if the directors want to retain some or all assets of the company, then that is a different case. The reason behind such a practice by the director may be the sentimental value that they hold with the company and thus can use the assets for personal use or other future business endeavours. When the director wishes to keep some assets with him, then the allowance is provided against the condition that the assets will be sold off by the insolvency practitioner at the market rate as established by the independent valuer.
After the sale
The payment to the company’s outstanding creditors will be made by the amount gained by selling the assets.
Any employers will now be asked to look for new jobs elsewhere. After the completion of the liquidation process, the name of the company is removed from the register of the Companies House, and therefore the company ceases to exist. Things may be comparably easier if a company adopts the solvent liquidation process, though it is not fully determined by the company that which liquidation process it has to go through. In the case of a solvent liquidation, the owner in most circumstances will be able to start a new company and start trading again by buying company assets by the liquidator.
What happens during Insolvent liquidation?
When the company is threatened by the fact that it is not able to make any recoveries against any liabilities, or in simple words if the company’s real value of liabilities exceeds than the value of its current assets, then the company has turned off all of its operations and pay off its creditors and shareholders or investors by selling its property and other relevant assets.
Section 123 of the Insolvency Act 1986 has three different tests to determine the insolvency of the company.
- The Cash Flow Test – If the company can fulfil its debts when unforeseen conditions arrive.
- The Balance Sheet Test- If the company’s liabilities exceed its assets.
- The Legal Action Test – That is any creditor took legal action against the company like the County Court Judgement (CCJ)
Some of the general causes of insolvent liquidation.
Companies can become insolvent several reasons like that of a misconduct charge or dictatorship ban on the director. But there are many other reasons behind a company becoming insolvent without the directors’ involvement. Some of them are-
- Receiving late payments from customers,
- A significant dip in the market.
- Getting affected by the recession or inflation conditions.
- An incorrect pricing of goods or internal frauds in the company.
- Significant increase in the competition.
- Cash flow crisis caused due to limited funds.
- Excessive debts and lack of stable sales.
- Loss of important customers and poor retention of important employees.
Companies even try to enter a voluntary state is the director wishes to eliminate any potential risks to the creditors. For this purpose, an official termed as insolvency practitioner is appointed. The process generally is not court led, and therefore, the director can enjoy the freedom to appoint this official.
What happens after insolvent liquidation?
After the company getting indulged in the process of insolvent liquidation, shareholders vote on that if they want to pass a ‘winding-up resolution’ and place the country into voluntary liquidation. This winding-up resolution is then sent to the Companies House within fifteen days from the voting day by shareholders. At least 75% of votes are required to decide whether a liquidator will be appointed to continue the liquidation process. Assets of the company are then evaluated and realised among the creditors. Whereabouts related to business during the working days of the director and other relevant information of the director is investigated for any wrongful or illegal ideas.