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liquidation vs. business rescue
21 April 2021

The past 12 months has been a difficult and challenging time for thousands of businesses across the UK due to the pandemic and subsequent lockdowns. If your company has struggled financially and is now insolvent, meaning it can no longer pay its bills or debts, then it’s time to look at your options.

From liquidation, through which a company is liquidated and dissolved meaning it will cease to trade and operate, to options for business rescue such as a Company Voluntary Arrangement or administration which aim to turn a business around. Every director needs to know what routes are open to them.

To help, in this guide Clarke Bell outlines what options are available to insolvent businesses, to help you find the best next steps for you.

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Liquidation vs. Business Rescue

Option 1: Liquidation

Liquidation is a way of formally closing down a company. As a legal insolvency process, a licensed Insolvency Practitioner must be appointed to carry out the process.

Through the liquidation process, a company’s assets are sold and any realisation is distributed to the company’s creditors. Next, the business is dissolved meaning it is struck-off the registrar of companies.

There are two main types of liquidation:

Compulsory liquidation

One form of insolvent liquidation is compulsory liquidation. Here, a company is forced to close by creditors who are unable to recover debts they are owed of more than £750.

If your company goes into compulsory liquidation, then you as the business owner will have almost no control over the process.

Creditors who are owed money can issue a winding-up petition to the court. Once a winding-up petition has been issued, it will be served to the company and advertised in The Gazette 7 working days later. Next, the court will then either approve or dismiss it.

If successful, the court can force the company into liquidation which will be carried out by a licensed Insolvency Practitioner appointed by the court.

As it sounds, compulsory liquidation is the most serious form of liquidation. If you are threatened with compulsory liquidation, it is always best to act quickly to ensure that more options remain open to you, including voluntary liquidation.

Creditors’ Voluntary Liquidation (CVL)

The other main form of liquidation is voluntary liquidation. Unlike compulsory liquidation, voluntary liquidation is a completely voluntary process that is initiated by the company directors and shareholders.

Creditors’ Voluntary Liquidation is entered into by a director that chooses to voluntarily end the business and liquidate all of its assets. This is an option open only to insolvent companies and is a good way for the director to take control and close the business before it is forced into compulsory liquidation.

Again, a CVL is a formal insolvency process and as such, an Insolvency Practitioner must be appointed to carry out and oversee the process.

One advantage of a CVL is that it shows that the company director has taken proactive steps towards meeting their debt obligations and paying back creditors money they are owed.

The director is showing that they acknowledge their legal duties to creditors, therefore mitigating any risk of wrongful trading.

More options will be available to the director in the future if they choose to act, with the opportunity to open another business if they so wish remaining open to the director.

In both types of insolvent liquidation – Creditors’ Voluntary Liquidation and compulsory liquidation – an Insolvency Practitioner will conduct an investigation into the company’s transactions.

If any evidence of wrongdoing is discovered, it will be reported to the Insolvency Service and could lead to fines or a director’s disqualification. If this is the case, the director can become personally liable for any debt.

Option 2: Business rescue

However, if a licensed Insolvency Practitioner believes that a company has real chances of rescue, a different set of options will be open to you, including:

Company Voluntary Arrangement (CVA) 

For insolvent companies looking for business rescue, a Company Voluntary Agreement can be a good route forward.

With a CVA, a licensed Insolvency Practitioner will be appointed to put forward a formal proposal to creditors to help find a way to turn the business around and restore profitability.

Here, both the directors and creditors come to a formal agreement where the creditors will accept a sum of money as a way of settlement towards the debts they are owed. 75% of the creditors must agree for this to progress.

Once this is agreed, the company can continue to trade and the director will remain in control.

Administration

Another option for insolvent businesses looking for rescue is to enter into administration.

This is an option that aims to take control of the company’s assets and repay creditors money that is owed to them.

When a company goes into administration, they are given protection against any legal action. An Insolvency Practitioner is appointed as the administrator and whilst they are overseeing the case, no other party can apply to wind-up the company.

Let Clarke Bell help you with the next steps

If your company is having serious cashflow problems and you’re considering liquidation or looking for ways to turn things around, Clarke Bell can help you.

Over the past 26 years we have helped thousands of company directors. So, you can rest assured that you are in safe hands.

To find out more about how we can help you, get in touch today.

Get in touch to see how we can help

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If you are worried about your business or just want a (free) no obligation chat, contact Clarke Bell on 0161 907 4044 or [email protected] today. Our Licensed Insolvency Practitioners will provide you with the best professional advice for your situation.

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