The difference between insolvency and winding up can be very important in certain situations. Contact our expert team for friendly help.
Insolvency is the generic term that refers to either a company, a legal entity, a partnership or an individual who is unable to pay their debts as and when they fall due. In addition, in the case of a company and pursuant to section 123 of the Insolvency Act 1986, it can also mean that the value of the company’s assets is less than the amount of its liabilities (taking into account its contingent and prospective liabilities).
The key point in determining whether an entity is insolvent or not, is whether that entity can pay its debts as and when they are due. This is determined by the dates that your debts are due for payment according to the terms imposed upon you by your various contracts. This means that not all debts will be due at once. It is important to assess whether at the relevant time you are able to meet the obligations that are actually due or not.
Winding up / liquidation
Winding up is focused on ending the business affairs of the company and terminating company obligations before liquidation. There are various types of liquidation dealing with both solvent and insolvent situations. A summary of the various types of liquidation are as follows:
1. Creditors’ voluntary liquidation (CVL)
A creditors voluntary liquidation CVL is where the directors have concluded that the company can no longer continue to trade because of its inability to meet its debts and that they must now resort to taking steps to place the company into liquidation. This is a voluntary process which does not involve the court but does, however, require creditor approval.
2. Compulsory liquidation
A Compulsory Liquidation is where the company is wound up by an order of the court. This will normally be the case where one of the creditors is keen to seek repayment of the debt and believes that the company had delayed far too long with payment. Often in a compulsory liquidation asset realisations are minimal with little or no return to the creditors.
3. Members’ voluntary liquidation (MVL)
A Members’ voluntary liquidation is a solvent form of liquidation, where the assets of a company are greater than the total of all its liabilities. This process is usually used where shareholders decide to cease trading and convert the assets of the company to cash for distributions as dividends to them or sometimes for obtaining tax relief on capital distributions. An example may be where a SPV (special purpose vehicle) was formed for a specific purpose that has now been fulfilled and therefore there is no longer a requirement for the company.
Whether you want to wind up a company or are considering any other form of company insolvency, we are the experts for you. Our knowledge of the relevant company insolvency legislation combined with our day to day experience and team of experts makes us the first choice for companies in need of sound commercial advice.