Company Liquidation

A company is insolvent (unable to pay its debts) if it either does not have enough assets to cover its debts (ie value of assets is less than amount of liabilities), or if it is unable to pay its debts as they fall due.

Once insolvency is recognised, the insolvent company must ensure that there is no further depletion in of assets (or increase in liabilities). 

There are a number of reasons why a company might become insolvent.

• Loss of market share: where companies have not recognised the need to change in a shrinking or changing marketplace, because their margins have been eroded or because their service has been overtaken technically.
• Management failure to acquire adequate skills, either through training or buying them in, over-optimism in planning, imprudent accounting, lack of management information
• Loss of long term finance, over-gearing, lack of working capital/cashflow

The majority of business insolvency cases are liquidations in which there may be little to rescue and the licensed insolvency practitioner is likely to be left with little alternative but to sell off the company’s assets on a break-up basis.

This may be necessary because, for example, the business is beyond rescue, it's not possible to sell the business, the prime assets may be the employees who have left (in service companies for example), or because creditors will not approve a voluntary arrangement.

It is also often the case that the directors of a company do not seek help in sufficient time to allow the company to be saved, and by the time they do so it is hopelessly insolvent. Any of these reasons can lead to a company being placed into liquidation and its assets sold off. The proceeds of the sale are then distributed to the creditors, in a defined order of priority. 

Liquidation is, with very few exceptions, the end of the road for a company and it will then be removed from the companies register.

An insolvent liquidation will be either a creditors’ voluntary liquidation (CVL), which is begun by resolution of the shareholders, or a compulsory liquidation, which is instituted by petition to the court. Alternatively, a court can make a winding-up order for a compulsory liquidation on the application of a creditor or of the company itself.

Creditors’ Voluntary Liquidation (CVL)

A CVL is a liquidation begun by resolution of the shareholders, but is under the effective control of the creditors, who can appoint a liquidator of their choice. Because of changes in legislation placing greater onus of responsibility on the directors of a company, the CVL is the most common way for directors and shareholders to deal voluntarily with their company’s insolvency. This is because it is in the interests of the directors to take action at an early stage, in order to minimise the risk of personal liability for wrongful trading. Furthermore, unlike a compulsory liquidation, a CVL does not bring the directors’ conduct under the scrutiny of the official receiver, although the liquidator is required to report to the DTI on the conduct of the directors.