If you’ve been running your business at a loss for some time, it’s highly likely that you’ll be facing mounting debts and potentially seeing your business fail. This is not something people like to face up to but unless you act fast, these things will happen and you won’t have anything to hold on to in the future. If you seek professional help instead of watching your business fail slowly, you can save your business and revive your fortunes. One solution to extremely difficult financial problems in the business is liquidation.
Liquidation isn’t particularly hard to understand, it just means that the company is shut down, all assets are sold, and all trading is ceased. The type of liquidation that happens is highly dependent on whether the company is solvent or insolvent. If the company is completely unable to pay back its debts, then it is insolvent. Also, if the value of the assets is not enough to pay back the debts, the business is insolvent. If the company is able to pay back its debts in some way, it is said to be solvent.
With a solvent business, the liquidation process is called “Members Voluntary Liquidation” (MVL), basically meaning that the liquidation has not been forced to take action by their finances. MVL involves the directors of the company making a legal declaration that the business is solvent, and that the debt can be paid back within the next 12 months. The whole process of MVL should be relatively straightforward, with all creditors receiving full payment and the business simply ceasing to trade. Anything remaining in the company, such as assets or cash, is handed over to the shareholders or owner.
It may seem strange for a solvent business to suddenly stop doing business, but it is surprisingly common. MVL’s often take place because of personal reasons on behalf of the owner, or it could be that the business is felt to have fulfilled its potential and is no longer making any profits. By going through liquidation, a company can start afresh under a new name and begin trading again relatively quickly, so it can be useful.
The liquidation of an insolvent business is altogether more complicated. There are two possible liquidation procedures, one of which is a Creditors Voluntary Liquidation (CVL) and the other is called Compulsory Liquidation.
CVL is generally an option chosen by the shareholders or owner of the business; they will hire an Insolvency Practitioner who will inform the company’s creditors that the business has become insolvent. The creditors are then given the option to choose a liquidator who will sell the assets of the business and distribute the takings among the creditors. This type of liquidation strongly favours the creditors and gives them a chance to earn back the money they lost on the business in the first place.
Compulsory Liquidation is initiated by a creditor wishing to end the business. This is a complex legal process whereby the creditor will have to start legal proceedings against the business in question. If the business is still unable to pay their debts, a court ruling will appoint receivers to liquidate the company, sell off any assets and raise as much money as possible from the business.
It is almost impossible to give a fair review of each possible solution without knowing the specific circumstances of your business. You should seek professional help to decide which course of action to take. Bear in mind that each will have their own disadvantages, none of them will be completely perfect especially if you are in financial difficulty. It is important not to make any rash decisions, and that you aren’t simply keeping the business alive because you enjoy it; if a business is losing money and is heavily indebted, there is not much you can do to save it.