Although many people assume that business liquidation applies only to those who are officially insolvent, this is not always the case. Liquidation is a process that works for both solvent and insolvent companies, with the principal difference being that the proceeds of insolvent liquidation go to creditors.
In this article, we’ll explore the essential definitions of solvent and insolvent liquidations and examine a few of the reasons why a company might decide that either a creditors’ voluntary liquidation (voluntary insolvent liquidation) or a members’ voluntary liquidation (solvent liquidation) is the right option for them.
Solvent liquidation (members’ voluntary liquidation) is the process of closing a financially stable company that can pay off all its debts. It is typically initiated by directors seeing a tax-efficient means of closing a business with assets above £25,000[1]Trusted Source – GOV.UK – Liquidate a company you do not want to run anymore.
The process of solvent liquidation is relatively straightforward. The company’s shareholders will vote to dissolve it and appoint a liquidator. The liquidator’s role is to collect and realise the company’s assets and distribute any proceeds among the shareholders.
The impact of solvent liquidation on stakeholders is generally minimal. In most cases, the company has reached the end of its natural life, and the director uses the MVL as an exit strategy, perhaps before retirement.
What is Insolvent Liquidation?
Insolvent liquidation is the process of closing a company that cannot pay its debts. A creditor typically initiates this type of liquidation through a petition to the court. The court will then appoint a liquidator to oversee the process.
The causes of insolvent liquidation can vary, but it is often the result of financial difficulties such as poor management, economic downturns, or fraud.
It’s important to note that the company’s directors can be held liable for its debts if they are found to have traded while the company is insolvent.
The insolvent liquidation process is more complex than solvent liquidation as the liquidator’s main role is to investigate the company’s affairs, realise its assets, and distribute the proceeds among the creditors.
The liquidator is also responsible for ensuring that the process is carried out in accordance with the law and that the creditors’ rights are protected.
What are the Differences Between Solvent and Insolvent Liquidation
Some of the main differences between solvent and insolvent liquidations are :
With solvent liquidations, the business owners retain some influence on the process. In an insolvency situation, the directors and shareholders must step aside completely, and the appointed Insolvency Practitioner will investigate whether the company was lawfully run in financial terms in the period leading up to liquidation.
Insolvent liquidations of limited companies may trigger personal liabilities for the directors and/or shareholders if they have given personal guarantees for company borrowings or where the directors have acted unlawfully.
The process, timing and costs associated with solvent liquidations are completely different from insolvent liquidations.
We are specialists in all types of company liquidations. We have a team of advisors to help small business clients decide on what is the best available option, and we also have experienced licensed Insolvency Practitioners to deal with liquidations.
Summary
In summary, solvent and insolvent liquidation are two different types of ways to close a limited company. Solvent liquidation occurs when a company is financially stable, whereas. insolvent liquidation occurs when a company is unable to pay its debts.
The process of solvent liquidation is relatively straightforward, while the process of insolvent liquidation is more complex, and the legal requirements are stricter. The impact on stakeholders is also different in both cases, in solvent liquidation the company’s creditors and employees will be paid off in full and the shareholders will receive a distribution of the remaining assets, while in insolvent liquidation the company’s creditors and employees will not always be paid in full, and the shareholders are unlikely to receive any money back.
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References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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