What Is The Difference Between Solvent And Insolvent Liquidation

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The term “liquidation” is usually associated with insolvent companies. However, the liquidation process can also be implemented in solvent companies, as an efficient way to extract its assets before going out of business. Although the reasons for initiating the liquidation process are different, both solvent and insolvent liquidation are essentially a means of realizing the company’s assets before shutting the business down.

Insolvency

Insolvency can occur as a result of a number of reasons. While some of them can be associated with director misconduct, there are also factors beyond control which can lead to a company becoming insolvent, such as the insolvency of major business partners, an increase in competition, late payments, inability to get back a loan etc. By definition, a company is insolvent when its liabilities become greater than the value of their assets, or when it cannot pay its creditors.

Insolvent liquidation

Once the company is determined to be insolvent, going through with the liquidation is the right course of action for both the shareholders and the directors. There are two forms of insolvent liquidation. A Creditors Voluntary Liquidation (CVL) is a process initiated by the company’s shareholders, in order to close down the insolvent company and convert its assets into cash to cover the company’s debts. In order to begin with the process, the shareholders must agree to put the company in liquidation and appoint a liquidator. The liquidator’s role in the process is to convert the assets into cash for the benefit of the creditors and the shareholders. The money from selling the assets is distributed among all interested parties, with the creditors having priority. After settling all the debts, the surplus, if any, is received by the shareholders. On the other hand, a Compulsory Liquidation is a process led by a competent court, and essentially represents legal proceedings initiated by a creditor, in order to settle an outstanding debt. When facing insolvency, it is prudent for any director to seek bankruptcy advice, in order to ensure the issue is handled in the best possible manner.

Solvent liquidation

Liquidating a solvent company through a process known as a Members’ Voluntary Liquidation (MVL) is a way of closing down the affairs of a company and extracting the company’s assets, in order to distribute them among the directors and shareholders. There are several reasons for the directors to opt for liquidating a solvent company. With the market and business environment constantly shifting, company managers may realize that a solvent company is no longer viable and is likely to start operating at a loss in the future. By liquidating it, the shareholders and the directors are able to realize the assets (such as vehicles or property) of the company and either retire or reinvest in a new business. The Members’ Voluntary Liquidation process also provides the directors with the means to dissolve a company while making sure there are no unattended issues to worry about in the future.

The benefits of the liquidation process

An appropriate liquidation process can be employed regardless of whether the company in question is facing insolvency, or is going out of business for other reasons. In the case of an insolvent company, proceeding with the liquidation process is the responsible course of action for the company director. By discontinuing the business operations of a company trading at a loss, the interests of the creditors are protected and increasing the existing debts is prevented. By acting pre-emptively the company can avoid compulsory liquidation, thus minimizing the risk for its shareholders. Similarly, a liquidation process can also be beneficial for a solvent company in some circumstances, as described above. Although the company is dissolved in both cases, the main difference between liquidating a solvent and an insolvent company is in the recipients of the realized assets. While liquidating a solvent company is mainly to the benefit of its directors and shareholders, insolvent liquidation is primarily initiated in order to repay the company’s creditors.

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