Monday, May 23, 2022

    Understanding Liquidation

    There are three types of liquidation. If a business is insolvent it could enter into a Creditors Voluntary Liquidation or a Compulsory Liquidation. However, if the business is solvent but circumstances dictate that it should be wound up, it could enter into a Members Voluntary Liquidation.

    Understanding a creditors voluntary liquidation

    The most common form of liquidation, this route is usually the last resort for a business, as it is insolvent and cannot continue trading. With the assistance of an Insolvency Practitioner, directors would arrange meetings with the members and creditors to wind the company up and appoint a Liquidator. If the company has not already done so, it would now cease to trade. All assets including any book debts would be realised and proceeds of these would fund the cost of the Liquidation.

    Excess funds would be made available as a dividend to creditors in the order of priority laid down by statute. If the business has insufficient assets to cover the associated costs, the Liquidator may require the directors to personally pay the costs. The level of these would be agreed between both parties prior to the Liquidator proceeding. Any excess funds would be available as a dividend to creditors, payable in the order of priority again laid down by statute.

    Understanding a compulsory liquidation

    This is a legal process by which a Liquidator is appointed by order of Court to wind-up a limited company and is usually commenced by a creditor such as H.M Revenue & Customs. A winding-up-petition must not be ignored, and it is imperative to seek advice from an Insolvency Practitioner. Bank accounts would be frozen and a Winding-Up Order would stop the business from trading as its affairs are investigated by the Official Receiver who would decide whether to call a meeting of creditors in order to consider the appointment of a Liquidator. All assets of the company, including book debts, would be realised and proceeds of these would fund the cost of the Liquidation.

    Understanding a members’ voluntary liquidation

    This route provides a greater degree of certainty than a striking-off and can be a useful tool in re-structuring. The Insolvency Practitioner will manage the whole procedure and ongoing liability only lasts until dissolution, compared to several years in a striking-off. This is the liquidation of a company which is solvent, i.e. asset rich and can take place for several reasons. The directors would be required to produce a schedule of assets and liabilities known as a declaration of solvency. This document would state that all the company’s debts would be paid in full within twelve months of the date of the liquidation.

    In order to pass the resolutions to wind the company up and appoint a Liquidator the directors would pass resolutions at a board meeting and the members would attend an Extraordinary General Meeting. At this point the company would cease trading if it had not already done so. All assets of the company including book debts would be realised and proceeds of these would fund firstly the cost of the Liquidation then all creditors would be paid and finally a dividend would be paid to members. Indeed, an Members Voluntary Liquidation could enable members to extract their investment from a company in a co-ordinated manner in order to benefit from effective tax planning. A final meeting would be summoned by the Liquidator when their duties had been completed and the business would then be dissolved three months after the final meeting.

    Reviewing your credit facilities

    In recent years, businesses have become hooked on easy credit. Lenders had agreed loans ignoring the basic principles of lending such as ability to repay, good cash flow or securable assets.

    Well, that party is over with a brisk return to far more conservative principles. It is timely for all businesses to get used to living in a brand new world of restricted credit.

    Let’s start at the very beginning

    It is imperative to carefully consider some of the main purposes for which credit is traditionally sought and to decide which, if any, are available or even necessary in the future. These could include:

    • Stability

    • Transition

    • Expansion

    • Protection

    Most business failures are attributed to a breakdown in cash flow and a common knee-jerk reaction has been to seek additional funding. However, lack of cash is a symptom rather than a primary cause of financial problems. It is the cause that needs identifying and quickly rectified.

    Future ebbing away

    Supporting a failing business artificially by constantly injecting more and more finance just to keep it afloat, without even addressing the fundamental symptoms, will almost certainly lead to inevitable collapse.

    Too late

    Whereas all new government legislation is geared towards saving businesses, often it is far too late as most of the constructive procedures become impossible due to often well-meaning but misdirected efforts to shore up the business. It cannot be stressed strongly enough that business owners should always seek professional advice from their accountants, solicitors, or bankers before committing resources. It might even be wise to include a licensed insolvency practitioner in the line-up if things are proving particularly problematical.

    Aggressive collection tactics

    One of the more worrying side-effects of the lower availability of credit, currently being experienced by many businesses, has been a far more aggressive approach to debt collection. Now it could well be that the downturn and all its derivative effects could be the trigger to steer businesses away from many of the misguided approaches to cash crises and towards better planned and more constructive approach.

    Turning pain into gain

    It would be a truism to state that we have all become far too reliant on easy credit over the years. Perhaps if the economic downturn teaches us anything at all it is that the new world of restricted credit may cause some pain but we might move on towards a bright new future where unnecessary business failures become a thing of the past.

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