There are four main formal insolvency proceedings available to a company:
Compulsory Liquidation – This is an insolvency procedure that applies to companies (and partnerships) and is started by a court order – a winding-up order. A winding-up petition is filed at Court, normally by a creditor stating that the company owes a sum of money that is overdue. A winding-up order can still be made even if the company has no assets or disputes the amount claimed. Any disputes over debts should be resolved with the creditor(s) before a winding-up order is made because the effects of the order are severe. If a director does not attend the hearing of a winding up petition, an Order may be made even if the debt is disputed.
Voluntary Liquidation – A company can only be put into voluntary liquidation by its shareholders. The liquidator appointed must be an authorised insolvency practitioner. There are two types of voluntary liquidation:
- Members’ Voluntary Liquidation – This is when the shareholders of a solvent company decide to put it into liquidation and there are enough assets to pay all the debts.
- Creditors’ Voluntary Liquidation – This is when the shareholders of the company decide to put the company into liquidation, but there aren’t enough assets to pay the creditors in full. i.e. the company is insolvent. The liquidation begins from the time the resolution to wind up is passed. The directors ask a Licensed Insolvency Practitioner to convene a meeting of creditors so that a Liquidator can be appointed.
Company Voluntary Arrangement – If your limited company is insolvent, it can use a Company Voluntary Arrangement (CVA) to pay creditors over a fixed period. If creditors agree, your limited company can continue trading. The business will now be solvent and can start trading again. You make the scheduled payments to creditors through the Insolvency Practitioner often for five years until these are paid off.
Administration – Administration stops any legal action or process against a company from proceeding, unless the Administrators or the English Court give permission. This means that creditors can’t take legal action against a company in administration to recover outstanding amounts. It offers creditors the prospect of at least some return. If the Administrator is unable to rescue the Company as a “going concern” they must try to achieve maximum realisation and distribution of its assets.
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