Insolvent liquidation

Insolvent liquidation is a sometimes necessary process for companies that can no longer meet their financial obligations. It offers a structured way to wind down operations, repay creditors and dissolve the business. Choosing insolvent liquidation can mean freeing yourself of debt, ready to get started on the next step in your business journey.

By understanding the key aspects, such as how insolvent liquidation can be used to tackle HMRC debts, whether it’s applicable to Bounce Back Loans, and what the process involves, you can make informed decisions and minimise risks. 

If your business is struggling with financial challenges and you want to speak to an expert today, contacting our team of licensed insolvency practitioners will help you to explore your options.

What is insolvent liquidation?

Insolvent liquidation is a formal insolvency process undertaken when a company cannot pay its debts as they fall due or when its liabilities exceed its assets. It’s often seen as the last resort for businesses that have exhausted all other avenues of financial recovery. Through this process applicable assets are sold to repay creditors, freeing the company of debt.

The two primary forms of insolvent liquidation are:

Creditors’ Voluntary Liquidation (CVL) – A voluntary process initiated by the directors.

Compulsory Liquidation – Initiated by creditors through a court order.

The insolvent liquidation process is governed by insolvency laws in the UK, so that creditors receive fair treatment. Understanding the intricacies of insolvent liquidation is crucial for directors, shareholders and creditors, as it determines how assets are distributed and helps directors meet their legal responsibilities.

When can you use insolvent liquidation?

Insolvent liquidation is appropriate in scenarios where a company’s financial health is beyond repair. Below are some common indicators of insolvency:

Inability to pay debts on time: Your company cannot meet its financial obligations, such as paying suppliers, employees or HMRC.

Overwhelming liabilities: When liabilities exceed the company’s assets on its balance sheet.

Creditor pressure: Persistent demands, statutory demands or court actions initiated by creditors.

HMRC debts: Outstanding tax debts, including VAT, PAYE, and Corporation Tax.

Unmanageable Bounce Back Loans: Challenges in repaying government loans during difficult financial periods.

You must act promptly when you suspect insolvency. Continuing to trade while insolvent can lead to serious legal consequences, including accusations of wrongful trading. Insolvent liquidation provides a structured exit, helping you fulfil your obligations while minimising further losses.

What is the insolvent liquidation process?

The insolvent liquidation process ensures that a company’s assets are fairly distributed among creditors. Below is a step-by-step breakdown of the process, focusing on Creditors’ Voluntary Liquidation (CVL):

Step 1: Identifying insolvency: Directors must first confirm that the company is insolvent by assessing cash flow and balance sheets. Professional advice from licensed insolvency practitioners is highly recommended at this stage.

Step 2: Appointing a licensed insolvency practitioner: The directors must appoint a licensed insolvency practitioner to oversee the liquidation. This professional plays a key role in the insolvency proceedings, ensuring that all legal requirements are met.

Step 3: Shareholders’ resolution: Any shareholders must pass a resolution to place the company into liquidation. This resolution must be agreed upon by at least 75% of the company’s shareholders.

Step 4: Creditor notification: Once the decision for liquidation is made, your insolvency practitioner notifies all creditors. A creditors’ meeting is arranged, allowing creditors to discuss and agree upon the liquidation.

Step 5: Selling assets: We’ll take control of the company’s assets, which are then valued and sold. We’ll then distribute the proceeds among creditors based on their priority in the insolvency process.

Step 6: Distributing funds: We use the funds generated from the sale of assets to repay creditors. We pay secured creditors are first, followed by unsecured creditors and shareholders.

Step 7: Dissolving the company: Once all assets are sold and debts settled as far as possible, the company is officially dissolved and removed from the Companies House register.

This structured approach ensures compliance with UK insolvency laws and protects your directors from legal liabilities. If you’re ready to speak to our team about your business’ financial challenges, get in touch today for free, confidential advice.

HMRC debts and insolvent liquidation

HMRC debts are a significant concern for many companies undergoing insolvency. These include unpaid VAT, PAYE and Corporation Tax. Failure to meet your tax obligations can lead to enforcement action by HMRC, such as winding-up petitions, freezing orders or asset seizures.

If you were to use insolvent liquidation to free yourself of HMRC debt, HMRC is considered a “preferential creditor.” This means their debts are prioritised over unsecured creditors during the asset distribution phase.

Directors must ensure they act responsibly when dealing with HMRC debts. Trading while knowingly insolvent could lead to personal liability for unpaid taxes. Seeking advice from an insolvency practitioner early can help directors navigate HMRC-related challenges and avoid legal complications.

Bounce Back Loans and insolvent liquidation

Bounce Back Loans, introduced during the COVID-19 pandemic, provided much-needed support to struggling businesses. However, repaying these loans has become a burden for many companies facing financial difficulties. 

If this sounds like you, insolvent liquidation could provide a legitimate way to address unmanageable Bounce Back Loan debt, especially for directors who acted responsibly during the loan period. Some key factors to consider are:

Is your Bounce Back Loan unsecured? Bounce Back Loans lenders were not allowed to ask for a personal guarantee, that directors could not be held personally liable for the debt. 

How did you use the loan? If the loan funds were not used for the intended purpose, such as business operations, you need to consult a professional as soon as possible. 

Is your company now insolvent? Companies unable to repay Bounce Back Loans might be able to include these debts in the liquidation process.

Get free, confidential advice on what to do next. Call our team of licensed insolvency practitioners to talk about your options.

Why act quickly during insolvency?

Delaying action when your company is insolvent can make financial problems worse – and possibly lead to a creditor filing a winding up petition. Here’s why it’s essential to act swiftly:

You protect directors: By engaging in the insolvency process, you can demonstrate that you acted in the best interests of creditors, minimising personal liability.

Maximising asset value: Early intervention can preserve the value of your company’s assets, ensuring better outcomes for creditors.

Avoiding wrongful trading: Continuing to trade while insolvent can result in accusations of wrongful trading, and may lead to legal repercussions. 

Engaging a licensed insolvency practitioner at the earliest sign of financial distress is crucial to navigating the insolvency process effectively. Get free, confidential advice on insolvent liquidation today.