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Published on 17 December 2012 by Tony Groom
Insolvent Liquidation and When and How it is Used
Insolvent Liquidation involves a formal process to close a company. It happens when
a company is insolvent, which means it does not have enough cash or liquid assets
to pay its debts and the directors have concluded that continuing to trade will be
detrimental to creditors.
There are four tests (set out in the Insolvency Act 1986) any of which can be used to
establish whether a company is insolvent.
They are:
• Failure to deal with a statutory demand
• Failure to pay a judgement debt
• Cashflow test, when the company is unable to pay its debts on time
• The balance sheet test, when a company’s liabilities are greater than its assets
The tests don’t necessarily mean that the company will have to close down,
although often directors assume that it must. However, there are remedies that could
save the company if at this stage it calls on a licensed insolvency practitioner or
business turnaround adviser, who would carry out a review of the accounts, the
assets including property, stock and debts and the liabilities. With help from the
adviser, the company can develop realistic plans for it to survive and trade out of
insolvency.
However, once it is decided that the company is insolvent, and cannot be rescued,
it should be closed down in an orderly fashion which means via a liquidation process.
This involves the company’s assets, such as the buildings, vehicles and equipment it
owns, being turned into cash, which is used to pay off its debts to creditors. In some
cases it is necessary to work out the company by continuing to trade for a period to
realise trading assets such as selling fresh produce or completing work in progress but
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2. this should be done with advice if the directors are to avoid potential for personal
liability that can accrue when trading while insolvent.
There are two types of liquidation, one compulsory and one voluntary and both are
legal processes.
Voluntary liquidation through a Creditors’ Voluntary Liquidation (CVL) is when the
directors of the company themselves conclude that the company can no longer go
on trading and should be wound up.
Normally they would engage an insolvency practitioner to help guide the directors
through the formal procedure, which involves a board meeting to convene
shareholder and creditor meetings.
In order to convene the shareholder and creditors meeting, the nominated liquidator
normally sends out notices to shareholders and creditors having obtained their
details from the directors. Preparation for meeting will involve the directors preparing
a statement of affairs. This is essentially a prescribed format liquidated balance sheet
that shows asset realisations by class of asset and creditor. It makes assumptions
about the value of realisations from sale of assets and shows all creditors including
contingent creditors that will crystallise due to termination of contracts e.g.
employees, leases and term agreements. Before the meetings, the directors will also
be expected to prepare a short history of events to explain the circumstances that
led to the company being placed into liquidation. The company’s advisers or
possibly the nominated liquidator may provide some assistance with these but
he/she will make it clear that these are prepared by the directors.
The shareholders meeting takes place before the creditors meeting to obtain
consent from at least 75% of the shareholders to approve the directors’ proposal that
the company be placed into liquidation. It will also consider and approve a
nominated liquidator. Given the notice period, in practice the directors normally
sound out shareholders before convening the meeting as they may seek a short
notice meeting providing they can obtain appropriate consent.
The creditors meeting only requires seven days notice (excluding postage normally
at least two days). The creditors must at the meeting either confirm the nominated
liquidator or obtain 50% support for another nomination. The nominated liquidator
must be a licensed insolvency practitioner who provides his consent to act which
must be available for inspection at the meeting. Such consent is normally only
provided once the nominated liquidator is satisfied about his/her fees. The creditors,
at the meeting, may also nominate a creditors committee that must comprise of
three or five creditors appointed by the creditors to assist the liquidator and to
represent them by overseeing the conduct of the liquidation.
If the directors have left consulting too late they can then find themselves facing the
court winding up procedure rather than having the option of a CVL.
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Call Tony Groom on 0844 8040 540

3. Compulsory liquidation is triggered by a creditor formally asking the courts to have a
company closed down by submitting a Winding Up Petition (WUP). In this case the
court decides whether or not to support the petition by ordering that the company
be wound up (compulsorily liquidated).
Upon a winding up order being made, an officer called the official receiver is
automatically appointed to take control of the company to oversee the process of
closing it down. The official receiver may, if he/she wishes, appoint a liquidator to
assist in dealing with recovering and selling any assets.
Whether the winding up is compulsory or voluntary the liquidator’s job is to write to all
creditors asking them to put in claims for the debt they are owed, to investigate the
directors and produce a directors conduct report, to convert assets into cash,
establish the legitimacy of creditors’ claims and finally make payments to creditors
following a strictly laid down legal priority.
We are not Insolvency Practitioners. We operate within the law to protect our clients
and their wealth. Our team has worked for over 20 years to help stabilise and return
hundreds of businesses to profitable growth. Once appointed, Insolvency
Practitioners do not work for you, they work for creditors and use your company’s
assets to pay themselves. We work for you, not creditors.
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K2 Business Rescue
The Emergency Service for Business
Call Tony Groom on 0844 8040 540