Business Liquidation as an Exit Strategy
If your company is unable to pay off the debts, then you should prepare a well-driven exit strategy. Selling a business to the potential buyer is a common way of getting out of the company. But for many, liquidating assets is the best method of exiting their businesses.
Liquidation is the process of winding-up a business to bring its current operations to a definitive end. In case, your company is near, or at insolvency, you can liquidate your assets and distribute the amounts owed to your creditors to avoid the dilemma of bankruptcy.
In this process, a liquidator is appointed to collect and deal with the company’s assets. He/she can also distribute any released funds to the creditors, debt holders, and then shareholders. Directors often select business Liquidation to protect them from insolvency and bring the business to an end.
Three different types of business liquidation can help you take the right decision depending on the position of your company in the present scenario.
Creditors Voluntary Liquidation
A Creditors’ Voluntary Liquidation (CVL) is a common insolvency process where the directors and shareholders appoint the liquidator to wind up their insolvent business. In simple terms, they can appoint their own liquidator to handle the entire situation. The appointed liquidator has the responsibility to go through the financial condition of the company, liquidate the assets (if required) and make distributions to creditors before closing the company. This type of liquidation is required when the company’s financial and operational activities collapse and are no longer feasible.
If your company is unable to pay its rents or bills and as a result, the landlord has appointed bailiffs to seize the company’s assets, then you should take advice from professionals and nominate your own liquidator. Merits associated with the Creditor’s Voluntary Liquidation:
- Directors are in more controllable position as compared to the provisional liquidation
- Instant release from debt stress
- Minimise the wrongful trading risk
- Makes it easy to buy back assets (after achieving stable condition)
Members Voluntary Liquidation (MVL)
A Members Voluntary Liquidation (MVL) is a process where shareholders are allowed to appoint a Liquidator to close a solvent company formally. The Liquidator liquidates all the assets to pay off all the outstanding and liabilities of the company. A capital distribution will be paid to shareholders from funds held in the organisation. This is a situation where business can be winded up before any financial collapse.
Since a solvent company is more stable than an insolvent one, there will be enough assets to not only repay all creditors but also enables you to make a distribution to the shareholders as well. This type of liquidation is relatively more reliable than Creditors Voluntary Liquidation for both directors and shareholders. Although the Directors of the company initiate MVL process, make sure you take 75 % of the approval from the shareholders to pass the winding up strategy. The key merits of Members Voluntary Liquidation are:
- Leases can be cancelled
- Low cost is involved as compared to other types of liquidation
- Outstanding debts will be paid off
- Shareholder distributions will be considered as capital distributions
Provisional Liquidation (PL)
A Provisional Liquidation is also known as an official Liquidation where a court appoints a Liquidator to manage the debts and liabilities of the company. It is used as an emergency measure to protect the assets of the company that may be at risk of being taken in some or another form. Provisional Liquidator can be applied by:
They can apply for PL if they feel that the directors of the company are not acting in the company’s interest. If they found director suspicious, they have the right to apply for provisional liquidation.
The company’s directors can also apply for the provisional liquidation if they want to avoid claims that they are involved in wrong trading activities due to the insolvency of the company.
In case, a creditor believes that the company’s asset at risk and would lower their returns, then they can make an application for provisional liquidation.
Once the Official Liquidator has been appointed, he will take control of the company’s assets, debts, accounting books and documentation. In this process, the Liquidator is not provided with the power to liquidate assets- they are appointed to protect them, and to investigate the points made in the application.