Guide to Insolvent Liquidation and When and How it is Used

Insolvent Liquidation involves a formal process to close a company. It happens when a company is insolvent, which means it does not have enough cash or liquid assets to pay its debts and the directors have concluded that continuing to trade will be detrimental to creditors.

There are four tests (set out in the Insolvency Act 1986) any of which can be used to establish whether a company is insolvent.  The tests don’t necessarily mean that the company will have to close down, although often directors assume that it must.  However, there are remedies that could save the company if at this stage it calls on a licensed insolvency practitioner or business turnaround adviser, who would carry out a review of the accounts, the assets including property, stock and debts and the liabilities. With help from the adviser, the company can develop realistic plans for it to survive and trade out of insolvency.

Once it is decided that the company is insolvent, and cannot be rescued, it should be closed down in an orderly fashion which means via a liquidation process. This involves the company’s assets being turned into cash and used to pay off its debts to creditors.

There are two types of liquidation, one compulsory and one voluntary and both are legal processes.

Voluntary liquidation through a Creditors’ Voluntary Liquidation (CVL) is when the directors of the company themselves conclude that the company can no longer go on trading and should be wound up.

Normally they would engage an insolvency practitioner to help guide the directors through the formal procedure, which involves a board meeting to convene shareholder and creditor meetings.

The nominated liquidator normally sends out notices to shareholders and creditors having obtained their details from the directors and helps directors prepare the necessary formal documentation that is legally required.

The nominated liquidator must be a licensed insolvency practitioner who provides his consent to act which must be available for inspection at the meeting.

If the directors have left consulting too late they can then find themselves facing the court winding up procedure rather than having the option of a CVL.

Compulsory liquidation is triggered by a creditor formally asking the courts to have a company closed down by submitting a Winding Up Petition (WUP. In this case the court decides whether or not to support the petition by ordering that the company be wound up (compulsorily liquidated).

Upon a winding up order being made, an officer called the official receiver is automatically appointed to take control of the company to oversee the process of closing it down.  The official receiver may, if he/she wishes, appoint a liquidator to assist in dealing with recovering and selling any assets.

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