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Liquidation and Bankruptcy

Liquidation, bankruptcy, administration, voluntary arrangements – these are just some of the industry-specific terms which grace our newspaper headlines. Sometimes the media gets confused referring to the appointment of receivers when in fact they mean administrators or liquidators. Here’s a definition of a couple of these terms.

Bankruptcy

This is a process available to insolvent individuals only – those who cannot meet their outgoings and commitments. It can be the result of poor cash management or even reckless spending. However frequently it follows changed circumstances where income drops perhaps as a consequence of illness, an accident, redundancy or a simple cut back in working hours. Commitments such as mortgage payments, rent, credit cards, hire purchase or loan payments which were previously paid on their due dates start to fall behind and can soon spiral out of control.

Bankruptcy relates to any type of debt. The law does not differentiate between consumer debt and business debt. An individual can become bankrupt as a result of being a member of a partnership which has hit financial problems or can be a sole trader where trade has ground to a halt.

The bankruptcy process can be started by the individual himself or by a creditor who is owed at least £5,000. Once commenced it affords protection from creditor action and pressure. It is a way for the debtor to have a fresh start following the bankruptcy, but he is likely to have to sell major assets such as an expensive car or house (if there is equity in it). Additionally, bankruptcy remains on the individual’s credit history for 6 years making the process of borrowing money in the future both difficult and more expensive.

Liquidation

Liquidation is a similar procedure to bankruptcy but relates to insolvent (*) limited companies and limited liability partnerships (LLP) rather than individuals.

There are numerous circumstances which can result in a company becoming insolvent, but the end result is the same – the company runs out of cash. Insolvency is where a company either cannot meet its liabilities as they fall due and/or where the value of company liabilities exceed its assets.

Like bankruptcy, the process of liquidation can be instigated by the company’s directors or creditors who are owed a minimum of £750. During the process, a licensed insolvency practitioner acts as liquidator and liquidates (i.e. turns into cash) all assets and distributes any proceeds amongst creditors.

Following the distributions of cash, the liquidator will investigate the conduct of the directors in the period preceding the liquidation for any wrongdoing or neglect of duties.

(*) Solvent companies can also be liquidated using a process known as a members voluntary liquidation (MVL), which can be a tax-efficient way of shareholders withdrawing their investment in the company.

Following the liquidation, the company will be dissolved and records struck off at Companies House. Thereafter the company will cease to exist.

References and further reading

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Authored by Phil Meekin

Phil Meekin

Head of Marketing