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Insolvency is a financial
condition experienced by a person or
business entity when their assets no longer
exceed their liabilities, commonly referred
to as 'balance-sheet' insolvency, or when
the person or entity can no longer meet its
debt obligations when they come due,
commonly referred to as 'cash-flow'
insolvency. In the UK, the term
bankruptcy is reserved for individuals;
a company which is insolvent may be put into
liquidation (sometimes referred to as
winding-up). In the UK it is a criminal offence to
trade whilst insolvent. However, there are
insolvency practices ("Administrators")
which aim to protect the creditors of the
insolvent individual or company and balance
their respective interests. Alternatives
such as Company Voluntary Arrangements and
Administration in the UK reflect this shift
towards a rescue culture. Liquidation
In law, liquidation refers to the process by
which a company (or part of a company) is
brought to an end, and the assets and
property of the company redistributed.
Liquidation can also be referred to as
winding-up or dissolution, although
dissolution technically refers to the last
stage of liquidation. Liquidation may either
be compulsory (sometimes referred to as a
creditors' liquidation) or voluntary
(sometimes referred to as a shareholders'
liquidation, although some voluntary
liquidations are controlled by the
creditors, see below). In finance,
liquidation is also sometimes used as
convenient shorthand for converting an asset
to cash.
Compulsory
liquidation
(or
compulsory winding up)
This
is when the court makes an order for the
company to be wound up (a 'winding-up
order') on the petition of an appropriate
person. If there is more than one director,
all the directors must jointly present the
winding-up petition - a single director
cannot present a winding-up petition.
Creditors' voluntary liquidation (or
creditors' voluntary winding up)
this is
when the shareholders of a company decide to
put the company into liquidation, but there
are not enough assets to pay all the
creditors, i.e. the company is insolvent.
Members' voluntary liquidation (or
members' voluntary winding up)
This is
when the
shareholders of a company decide to put it
into liquidation, and there are enough
assets to pay all the debts of the company,
i.e. the company is solvent.
What are the alternatives to
liquidation?
There are 3 possibilities:
- Informal arrangement - the
company could consider writing to all
its creditors to see if a mutually
acceptable agreement can be reached. It
is advisable to include a timetable of
when payments will be made.
- Company voluntary arrangement
(CVA) - this is a formal version of the
arrangement described above. The
directors would need to apply to the
court with the help of an authorised
insolvency practitioner, who would
supervise the arrangement and pay the
creditors in line with the accepted
proposals.
- Administration - this is a
court procedure that gives the company
some breathing space from any action by
creditors. A court can grant an
administration order to enable the
company to: survive, in whole or in
part, as an ongoing business; organise a
voluntary arrangement or compromise with
its creditors; get a better realisation
of assets than would be possible if the
company went into liquidation.
The procedure is managed by an
administrator, who must be an authorised
insolvency practitioner.
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