What-are-the-alternatives-to-company-liquidation

What options do you have for company liquidation?

Liquidation is a formal procedure used to shut down both solvent and insolvent companies. However, it’s not a one-size-fits-all process, and there are several types of liquidation. 

When a company is solvent, a Members’ Voluntary Liquidation (MVL) provides a tax-efficient path to closure. In cases where companies can’t continue due to overwhelming debt, a Creditors’ Voluntary Liquidation (CVL) is an option.

As the names imply, both of these procedures are voluntary and initiated by the company’s directors or shareholders. Another type of liquidation, Compulsory Liquidation (WUC), happens when a creditor submits a winding-up petition to the court.

There are several alternatives available for both solvent and insolvent companies if it’s determined that liquidation isn’t the most suitable course of action.

 

Exploring the alternatives to solvent liquidation

Company dissolution: It is also referred to as a company strike-off, and could serve as an alternative to a solvent MVL process in certain situations. This is usually applicable if the company has uncomplicated affairs and a relatively small amount of assets (generally less than £25,000).

Before opting for the strike-off route, it’s crucial to confirm the company’s solvency. Since the process is intended for solvent businesses, it can lead to complications if a creditor contests the process because they are owed money by the company.

As a director, it’s essential to ensure that all assets are addressed before closing the business, as any remaining assets under company ownership will pass directly to the Crown through a process known as ‘bona vacantia.’

 

What options are the alternatives for insolvent liquidation?

For companies facing financial difficulties with a potential for recovery, there are alternatives to insolvent liquidation. 

If your business is encountering financial challenges and you worry that it might be approaching insolvency, or perhaps it’s already there, liquidation isn’t the sole option available.

A licensed insolvency practitioner can guide you through your options, which may include a Company Voluntary Arrangement (CVA), Company Administration, or a process of company restructuring.

 

Company Voluntary Arrangement (CVA)- what does it mean actually?

A Company Voluntary Arrangement – or CVA – allows you to keep trading even if your company is facing cash flow and other financial challenges. 

This approach might be suitable for businesses experiencing temporary financial difficulties but is considered viable in the long term by a licensed insolvency practitioner (IP).

Negotiations occur between the indebted company and its creditors to alleviate the immediate financial burden. As part of this process, some debt may be forgiven, while the remaining amount is structured into a series of monthly repayments.

Creditors may encompass HMRC for tax debts and landlords if the company is bound by long lease terms. The company must meet its obligations throughout the entire term of the CVA, usually lasting 3-5 years, demonstrating ongoing viability to creditors.

Under this legally binding agreement, the company is shielded from creditor legal action, aiming to trade its way out of difficulty over a period of time.

 

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What is Company administration?

Company administration serves as another measure for rescue or restructuring and a potential alternative to insolvent liquidation. It’s especially beneficial for businesses facing relentless creditor pressure, offering an eight-week moratorium on creditor legal action.

The administration process presents several potential outcomes, the most suitable of which depends on the administrator’s evaluation of the company. The exit routes from the administration include:

1. CVA

The CVA described above is also a potential exit route from administration and could be employed to rescue the company if it meets the eligibility criteria.

2. Pre-pack sale

One potential outcome of entering administration is selling the business through a pre-pack administration, where the sale is arranged before the formal appointment of the administrator. 

In this scenario, you and other directors may have the opportunity to acquire some or all of the company’s assets from the liquidator and establish a ‘newco’ without the debt.

Undoubtedly, this could become a contentious issue for creditors, but stringent legal safeguards are in place to protect them.

3. Restructure/reorganization

The IP might determine that restructuring and streamlining the company’s affairs offer the best chance of recovery. This may involve selling non-essential assets, negotiating debt repayments with creditors informally, and/or shutting down non-performing parts of the company.

4. Liquidation

If it’s determined during the administration process that rescuing your company isn’t feasible, company liquidation might be the only available option.

While company liquidation might eventually be the suggested course of action for businesses facing financial difficulties, the UK’s insolvency regime provides potent and efficient alternatives. If you seek more information on alternatives to company liquidation, please don’t hesitate to contact our expert team.
Vanguard Insolvency provides free, same-day consultations and can determine the most suitable course of action for your company. We operate a wide network of offices throughout the UK.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.