Liquidation

COMPANY DEBT ANALYSER

What is business insolvency?
Business insolvency occurs when a business is unable to pay off its debts. This can either be because the business is cash flow insolvent or balance sheet insolvent. A business that is cash flow insolvent is unable to pay its debts when they are due and a business that is balance sheet insolvent has negative net assets, which means that their liabilities exceed their assets.

Liquidation
Liquidation is the process where an insolvent company stops trading and its assets and property are liquidated (turned into cash) in order to pay off the company’s debts. Liquidation is also referred to as winding up a business, and signals the end of the company, although in some circumstances it is possible for the ‘business’ to survive.

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Liquidation can either be compulsory or voluntary, and in the UK there are three types of liquidation:

Creditors Voluntary Liquidation
Compulsory Liquidation
Members Voluntary Liquidation
Creditors Voluntary Liquidation
Creditors Voluntary Liquidation is when the Directors and shareholders of the business voluntarily decide to fold the company because it is insolvent and so doesn’t have the sufficient assets to cover its debts. Businesses normally decide to enter this type of Liquidation when it feels that it can no longer continue to trade and it wants to settle its outstanding debts as soon as possible.

Compulsory Liquidation
Compulsory liquidation is when the Creditors who have not been paid by the business apply to the High Court to wind up the business, the business is then liquidated and the creditors paid. Creditors only need to be owed £750 or more to start this process. If the court agrees to the Creditors petition and the debt is not paid then a hearing is held, at the hearing the judge has the power to pass an act to compulsorily liquidate the company in order to settle its debts.

Members Voluntary Liquidation
Members Voluntary Liquidation is the process used when a company is solvent, that is the business has assets to cover its debts, however the company’s shareholders decide to wind up the company in order that the assets be used to pay off the debts owed in full. This process is chosen when the shareholders want to either cease trading and withdrawn their investments or restructure the company.

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