Insolvency can be a complex term to understand, to help you understand the different elements, we have created a list of frequently asked questions. Our insolvency practitioner is able to offer advice on all aspects of insolvency, from company to voluntary insolvency processes. As a licenced insolvency practitioner based in Plymouth, St. Austell, Truro and Penzance we are readily available to many South West businesses.
Q: What does insolvency mean?
A: A business is insolvent when it is behind in its payments to employees/HMRC/suppliers/financiers and have no clear opportunity in the near future to get back on track. Evidence of insolvency includes: tightening of cash flow, creditors sending chasing letters, bailiffs and/or court enforcement.
Q: What is the difference between liquidation and administration?
A: Liquidation refers to the process of a business ceasing trade and turning its assets into cash. This marks the end of the company, however, the business may survive this process.
The three types of liquidation processes:
- Creditors’ Voluntary Liquidation (CVL)
- Compulsory Liquidation
- Members’ Voluntary Liquidation
The first two are used to tie up and close an insolvent company, Members’ Voluntary Liquidation is used to legally close down a solvent company that no longer has a purpose.
Administration is an option for businesses that have a viable future and reliable cash flow, it is used to protect the company and its assets from aggressive creditors whilst allowing time for restructuring. It is often regarded as a better alternative than liquidation, it commonly increases unemployment whilst removing any chance of a successor business.
Q: Do I Have To Use A Licensed Insolvency Practitioner?
A: Licensed Insolvency Practitioners are the only people who can deal with voluntary liquidations of companies. Liquidators can only act in their personal names; a company can not be a liquidator.
What you should be aware of, many have been offered liquidation services from a person who is not a licensed insolvency practitioner. Many of these are “finders” or “ambulance chasers” looking to make a fee for passing you over to an undisclosed Insolvency Practitioner. Often they will tell you what you want to hear and not give experienced, licensed tailored advice. We recommend always going directly to a Licensed Insolvency Practitioner.
Q: What does Cash Flow or Balance Sheet Insolvent mean?
A: When a company is falling behind with payments, with no clear opportunity to get back on track, then the company is likely to be insolvent.
Two tests can be undertaken to determine an organisation’s financial viability: the cash flow test and the balance sheet test.
The Cash Flow Test: This test checks whether the company can meet its obligations. Such as paying its debts when they are due.
The Balance Sheet Test: This test reviews the assets and liabilities of an organisation. If the asset value is less than outstanding liabilities, the company will be considered insolvent.
Our Licensed Insolvency Practitioners can undertake both of these tests and help to advise should your business be found to be insolvent.
Q: How much does liquidation cost?
Q: What happens to the assets of a company during liquidation?
A: Assets will be sold in order to raise funds for the benefit of the company’s creditors. If financed items are present, with equity in them, the liquidator may also be able to sell these to pay off the outstanding finance and utilise any surplus funds by adding them to the overall liquidation collection. An agent will be required to value all assets and determine which have sufficient value to be sold at an auction and which should be abandoned at the premises.
The agent will also review alternatives to an auction, such as selling of assets to third parties.
All funds raised from the selling of company assets will be utilised within the liquidation and then distributed to creditors in the order laid down in the Insolvency Act 1986.
Third party assets will be returned and cannot be sold.
Q: How can I turn my struggling company around?
A: Many directors may believe that when a company becomes insolvent, it is the end of their business and liquidation must be initiated. However, there are other options available for insolvent situations that can help to turnaround a business.
Our Licensed Insolvency Practitioners are able to help you to explore options and decide if an Independent Business Review is something that you require before proceeding to explore your options.
Q: How do I close down a Limited Company?
A: The process of closing a Limited Company depends on whether the company is solvent or insolvent. It is important to not lose sight that we offer business rescue advice and this may be a possibility for you.
If you are closing an insolvent Limited Company then a Creditors’ Voluntary Liquidation (CVL) is often the best option. Our Licensed Insolvency Practitioners are able to help you navigate this process.
If the Limited Company being closed is solvent then Members’ Voluntary Liquidation (MVL) is the best option. Allowing for a tax-efficient way for shareholder contributions above £25,000 to receive capital tax treatment rather being assessed as income.