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What are the alternatives to company liquidation?
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What are your options for company liquidation?
Liquidation is an formal process used to close down both solvent and insolvent companies, however, liquidation is not a one size fits all process, and there are in fact a number of different types of liquidation.
When a company is solvent, a Members’ Voluntary Liquidation (MVL) offers a tax-efficient route to closure. For companies unable to continue because of unmanageable debt, however, a Creditors’ Voluntary Liquidation (CVL) can be utilised. As the names suggest, both of these processes are voluntary in nature and initiated by the company’s directors/shareholders. Another form of liquidation, Compulsory Liquidation (WUC), occurs when a creditor presents a winding up petition at court.
Several alternatives to company liquidation do exist for both solvent and insolvent companies, should it be decided that liquidation is not the most appropriate course of action.
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Company dissolution, also known as company strike off, may be a good alternative to a solvent MVL process in some instances. This will typically be the case if the company has straightforward affairs and a relatively low level of assets (typically less than £25,000).
Before going down the strike off route, it’s extremely important to ensure that the company is actually solvent. As the process is only designed for solvent businesses, it can create problems if a creditor challenges the process due to them being owed money by the company.
As a director, you should also make sure that all assets are dealt with prior to closing the business, as any remaining under company ownership pass directly to the Crown under a process known as ‘bona vacantia.’
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There are a number of alternatives to an insolvent liquidation process for those companies who have a viable chance of turning around their fortunes. If your business is experiencing financial challenges and you are concerned the company may be approaching - or perhaps already is - insolvent, liquidation is not necessarily the only option. A licensed insolvency practitioner will be able to talk you through your options which may include a Company Voluntary Arrangement (CVA), Company Administration, or a process of company restructuring.
A Company Voluntary Arrangement – or CVA – enables you to continue to trade even if the company is experiencing cash flow and other financial difficulties. This process may be appropriate for businesses in temporary financial trouble, but which are deemed viable in the long-term by a licensed insolvency practitioner (IP).
Negotiations are entered into between the indebted company and its creditors in order to reduce the immediate financial burden. Some debt may be written off as part of the process, with the remainder structured across a series of monthly repayments. Creditors can include HMRC if you have tax debts, as well as landlords should the company be tied into lengthy lease terms. The company must be able to fulfil its obligations under the CVA for the full term, which typically runs for 3-5 years, meaning the business must be able to demonstrate ongoing viability to creditors.
Under this legally binding agreement the company is protected from creditor legal action, with the aim being to trade its way out of difficulty over a period of time.
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Company administration is another rescue/restructure measure, and potential alternative to insolvent liquidation. Administration is particularly valuable for businesses experiencing unrelenting creditor pressure, as it provides an eight-week moratorium on creditor legal action.
The administration process offers several potential outcomes, the most appropriate of which depends on the administrator’s assessment of the company. The exit routes out of administration include:
Pre pack sale
Selling the business via a pre pack administration, whereby the sale is arranged prior to the formal appointment of the administrator, is one potential outcome of entering administration. Under this route, you and other directors may be able to purchase some or all of the company’s assets from the liquidator and set up a ‘newco’ without the debt. Clearly, this could become a contentious issue for creditors, but stringent legal safeguards are in place to protect them.
The CVA described above is also a potential exit route out of administration, and could be used to rescue the company if it’s eligible.
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The IP may decide that restructuring and streamlining the company’s affairs will provide it with the best chance of recovery. This could include selling non-essential assets, informally negotiating debt repayments with creditors, and/or closing non-performing arms of the company.
If it is decided during the administration process that rescuing your company isn’t possible, company liquidation may be the only route available.
Although company liquidation could ultimately become the recommended course of action for businesses in financial difficulty, the UK’s insolvency regime offers powerful and effective alternatives. If you would like more information on the alternatives to company liquidation, please get in touch with our expert team.
Real Business Rescue offers free, same-day consultations, and can establish the most appropriate course of action for your company. We operate a broad network of offices across the UK.
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