What Are The Alternatives To Company Liquidation?
Financial difficulty is a daunting thought for any business. Every company wants to do as well as it possibly can, but the sad reality is that most will encounter some kind of problem during their lifetime. If these challenges are ignored or allowed to spiral out of control, company liquidation becomes a very real prospect.
While liquidation might be necessary or positive in certain cases, knowing when an alternative is more suitable is key to helping struggling businesses survive and thrive. Each alternative to company liquidation has its own benefits and disadvantages and understanding and considering these carefully is key to making the correct decision for your own circumstances.
Why Do Companies Liquidate?
Liquidation is typically thought of as a last resort for struggling businesses. When a company cannot pay its debts and is insolvent, liquidation is the formal process of shutting the business down and redistributing its assets to creditors. Insolvent liquidation can be either voluntary through creditors voluntary liquidation (CVL), or be compulsory when HMRC issues a winding-up petition to close the company down.
However, liquidation is a process that solvent businesses can also use. From time to time, a solvent business may reach the end of its useful life or company directors may wish to retire. In these circumstances, solvent liquidation through members voluntary liquidation (MVL) allows the company to distribute its assets in the most tax-efficient way before formally closing down.
What Can You Do Instead?
When business owners or company directors face financial challenges, it’s important that all options are considered. Particularly in circumstances where liquidation is compulsory, businesses may have no choice but to liquidate. However, if choice is an option or if your business is simply looking to understand how to stay away from compulsory liquidation should financial difficulty arrive, the following processes all offer alternatives to company liquidation.
Dissolution
Dissolution is often confused with liquidation as both processes result in the company in question being closed down. However, there are significant differences between dissolution and liquidation and the former is actually a suitable alternative to the latter in cases of solvent liquidation.
Rather than embarking on the MVL process, directors of solvent companies can also choose to apply directly to Companies House and have the business closed down. Typically, this option might be chosen when there are few assets and debts are already settled.
Administration
If staying afloat and existing into the future is the priority, administration can be a suitable alternative to company liquidation. Like liquidation, administration is also an insolvency procedure but focuses on the rescue of the business rather than closing it down.
When a company goes into administration, an insolvency practitioner takes control for an agreed period of time and looks for ways that the business can settle its debts. Administration is a particularly suitable alternative to company liquidation in situations where creditor pressure is building up. This is because legal action by creditors is temporarily halted during administration, giving the company breathing room to work out the next steps.
Company Voluntary Arrangement
In cases where financial difficulties are present but the company is deemed viable in the long term, a Company Voluntary Arrangement may also be a viable alternative to liquidation. Also known as a CVA, these are legal agreements between a company and its creditors to repay debts over a specified period of time.
Providing the obligations of the arrangement are met, a company can continue trading while a CVA is in place but benefits from protection against legal action while it recovers.
Restructuring
Struggling companies may also wish to consider restructuring as an alternative to liquidation. Simple organisational changes can go a long way, helping businesses to increase their efficiency, save money, and improve their overall financial position. Debts can also be restructured to take pressure off the company. Through debt restructuring, you may be able to extend repayment terms or access lower interest rates which can reduce financial pressure and help to preserve relationships with creditors before it is too late.
Do note that any form of restructuring can take a considerable amount of time and requires both internal and external stakeholders to be on board. This may not be the best alternative for companies with urgent problems that need addressing, but is a good alternative to liquidation for companies trying to cut out warning signs of trouble before they escalate.
Speak To An Expert
If you are concerned about the possibility of company liquidation and want to properly consider the alternatives available to you, an insolvency practitioner can help. While insolvency practitioners are the individuals who carry out a liquidation process, they are also able to advise on the other options available and help you to proceed with the best option for your position.
With years of experience helping businesses understand liquidation and its alternatives, the team here at My Liquidation are ready to help you. Simply get in touch today to discuss your situation and discover the most appropriate way forward.
