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.