When Is a Creditors’ Voluntary Liquidation Initiated?

In a situation where the directors of an insolvent company decide to bring their business to an end, the business will enter a process of the creditor’s voluntary liquidation process. Now, even though the initiation of the process is voluntary, once it’s initiated, it has to take a certain course over which, the given directors, won’t have much control. Still, it is definitely a business decision that has numerous benefits and it allows you to resolve a problem that the management believed was there to stay. Sure, it will be followed by weeks and months of uncertainty and distress, yet, often, it’s the only sensible way forward. Here’s what you need to know about the creditor’s voluntary liquidation and its initiation.

1. Why do this?

The first question worth asking, when it comes to creditors’ voluntary liquidation is – what are the benefits? What do you actually hope to get from it? The answer is fairly simple. First, all the outstanding debts get written off. Second, any legal action is halted. Third, even the staff can claim redundancy pay. The terms on the lease (that would otherwise go on for months) can be canceled, which can cross off one more expense off the list. In other words, while it liquidates the business, it’s something done to preserve the livelihoods of individuals under the corporate umbrella. 

2. What are the downsides?

Previously, we’ve discussed advantages, however, voluntary liquidation isn’t precisely the “get out of jail free card”. It’s not a mystical solution that makes all your problems just magically disappear. You see, there is always the likelihood that someone will take a closer look into the practices of all the company’s directors. In other words, accusations of wrongful trading are a real risk. Other than this, there’s still a personal liability for some company’s debts, especially if a director has made a personal guarantee. Finally, all assets will be sold and all staff will be made redundant. In other words, the solution is far from ideal and is only to be used when absolutely necessary.

3. Can you do it on your own?

The biggest problem with a creditors’ voluntary liquidation lies in the fact that it’s a complex legal process. You need to take into consideration many legal acts, rules and regulations. Since everything has to be done by the books, you might want to consider hiring some expert assistance. You see, voluntary liquidation is a solution to your problem only when done right. Still, insolvency isn’t a simple matter, which is why it needs to be properly evaluated. This is why you need someone with the necessary legal knowledge, as well as experience in the field to do so properly. 

4. What is compulsory liquidation?

One thing that the majority of people first notice about the voluntary liquidation is the very word voluntary. This makes them wonder about the difference between voluntary and compulsory liquidation. For instance, if a company is so severely indebted that it has no way of paying off its creditors, a statutory demand may be issued. Once this is done, you have a limited amount of time to cover all your expenses before the legal action is pursued. If not, this can go to the high court, which might end up with a forced order to liquidate the company.

5. When is a company classed as insolvent?

The first major challenge lies in recognizing that your company is classified as insolvent. Needless to say, this isn’t nearly as simple as you may expect it to be. Generally speaking, there are three solvency tests. The first one is the cash flow test, so if the company is able to pay all their bills when they are due, then the company is not insolvent. Second, you have a balance sheet test, which is the simplest one to evaluate. If the liabilities exceed the value of the assets, the company is insolvent. Lastly, you have a legal action test. If your company owes more money than it can repay, it’s insolvent.

6. What are the responsibilities of a director?

The question that should be of the most concern to you is – what are the responsibilities of a director in this situation? It is, however, more important to know what you definitely shouldn’t do. For instance, continuing to trade while knowing that your company is insolvent is incredibly risky. Sure, you have to trade in order to get out of the financial rough spot, however, this course of action can make you personally liable. Also, if you can’t pay back every creditor you owe, paying just one or select a few of them may also be quite risky. It’s called preference payment and you may be held accountable for it.

In conclusion

While the concept of creditors’ voluntary liquidation is something that every director out there hopes to avoid, the truth is that this is not always an option. Still, it’s vital that you understand it, as well as that you know the mechanics behind this. The knowledge itself would help you understand all your options in these moments of crisis and help you make the right call for your company.

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