Liquidation isn’t necessarily just for insolvent companies; depending on the circumstances, it can also be the most appropriate option for directors of solvent companies.
To understand when liquidation could be appropriate for a solvent company, you should first understand the difference between it, dissolution, and an insolvent liquidation, and when each would be suitable.
Insolvent closure vs solvent closure
Company closure is often synonymous with insolvency, but they are not mutually exclusive. Not every insolvent company has to close to clear its debts and return to profitability.
Depending on the insolvent company’s circumstances, it might be possible to repay an affordable portion of its unsecured debts in monthly instalments while the company continues trading. Alternatively, if the company has deeper-rooted issues, it may benefit from restructuring through administration. If creditor pressure is so severe that continuing to trade, or those previously mentioned solutions are unfeasible, then it might be in the company’s best interest to close through an insolvent Creditors Voluntary Liquidation (CVL). Doing so will ensure the company closes through an orderly, regulated process, leaving you free to start afresh.
All this is to emphasise that liquidation is just one of the options for an insolvent company. Speaking to a licensed and regulated insolvency practitioner will help clarify which options are suitable for your company.
Solvent companies, while there is rarely the same urgency as in insolvency, can also close for one of several reasons:
- The company needs to be liquidated as part of a reorganisation of several companies or as part of a merger
- Shareholders wish to close the company and extract the maximum value
- Directors wish to retire or do not want to run the business anymore
Solvent liquidation vs dissolution
Many solvent companies close through dissolution, but depending on your company’s circumstances, it may not be the most appropriate way forward.
A dissolution ends the company’s legal existence by striking it off the Register of Companies at Companies House, and is best suited for a company with few realisable assets that has come to the end of its useful life.
To qualify for dissolution, the company must not have engaged in the following in the three months leading up to your application to dissolve:
- Changed its name
- Traded or disposed of stock
- Is the subject of a prosecution or disqualification
- Has a non-finalised pension scheme
- Has an assigned administrator or receiver
While you can attempt to dissolve an insolvent company, creditors are likely to object and can have the company restored for up to six years after the attempted dissolution.
A solvent Members Voluntary Liquidation (MVL) can be more beneficial if the company has more tangible assets, specifically, more than £25,000 in cash. This may allow directors and shareholders to claim Business Asset Disposal Relief (BADR) once creditors are satisfied. Speak to a licensed and regulated insolvency practitioner if you’re considering a solvent liquidation. They are the only people who can carry out such a procedure.
To conclude
Liquidation isn’t just for insolvent companies and can be suitable for solvent companies in the right circumstances. If the company’s directors wish to retire without succession or just don’t want to run the company anymore due to a change in circumstances, or it has sufficient assets to claim Business Asset Disposal Relief, then it’s worth considering a solvent liquidation over dissolution.
Whatever your situation, you should speak to a licensed and regulated insolvency practitioner if you’re considering liquidation. They can advise you on the best course of action and are the only people who can enact either solvent or insolvent liquidation.
