Voluntary Liquidation

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Impacts of a Creditors Voluntary Liquidation

A Creditors Voluntary Liquidation (CVL) happens when a company, through its board of directors, willingly chooses to liquidate its affairs and end trade on the grounds of insolvency. It is a formal and legal procedure that enables financially struggling entities that can no longer fulfill its obligations to creditors for at least within a twelve month period to close shop on one’s own accord and not as forced by any outside party like creditors or the court itself. 

There are certain impacts or effects when such procedure is carried out and below are some of them. 

Bank accounts and assets are to be frozen. This is done in order to protect the creditors from any unjust withdrawal and disposal of assets. Should a sale of any asset, such as machineries, equipment or properties, occur during the CVL period then they are to be treated as invalid and unenforceable. The court can reverse such transactions. 

Trade ceases and a liquidator is to be appointed. Operations and trade shall stop albeit not abruptly. Of course, certain matters must be taken cared of first and the process made known to relevant parties. The level of trade allowed shall only be that which concerns and is attributed to the liquidation and not for profit purposes anymore. The company’s directors shall also choose and appoint a liquidator who is a qualified insolvency practitioner. 

It leaves a mark on credit score/history. Whenever a company liquidates, regardless if it is voluntary or not, it shall be reflected in one’s credit history and credit score. This shall ultimately affect one’s future credit and business transactions. Of course, this does not go to say that one can no longer go into business or borrow funds again. One can still do so but in the event that loans and similar other borrowings are to be taken, one has to do some serious explaining. Simply put, it may become a tad more meticulous to apply for credit but it’s not impossible. 

A Creditors Voluntary Liquidation protects the business from a winding up petition order. Because the entity chooses to liquidate, the risk of creditors filing for a mandatory liquidation or so called winding up petition is nil. This prevents the company from losing certain control such as the choice of liquidator. Moreover, directors will not be held personally accountable for failure to put creditor interest above all and for continuing to trade despite of the insolvency.

Read more about it here.

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Apoilleux on the Dangers of Insolvent Trading

Insolvent trading is one very dangerous spot to be seen in. It’s as tricky as it gets and comes with a lot of daggers rather than apples. Today, we shall discuss what these are with the help of the friendly professionals and experts over at the Apoilleux headquarters. Bring out some pen and paper for notes and let’s begin!

Before we delve on further, allow us to explain what insolvency is for those who haven’t heard of it or still find it a little vague. In the simplest sense, it is a state wherein an individual, organization or company has an inability to pay one’s obligations or liabilities as they mature and become due. This is for at least twelve months or a full fiscal year.

It can happen due to various reasons from poor cash flows, delinquent receivables, zero profitability, poor pricing and costing strategies, debt dependence, credit mismanagement and loss to competitor among others.

There are two main and initial tests to it. One is the balance sheet test that looks at the ratio between assets to liabilities. The second is the cash flow tests that assess the ratio and variance between cash inflows and outflows. However, it is important to remember that neither of the two is entirely and immediately conclusive. Further examination must still be performed.

Now, why is trading under the guise of insolvency a dangerous plank to walk on? Why is it considered a parade straight into the crocodile’s mouth? Simply put, it is illegal and the law sees it as a possible means to deceive both creditors and customers that you are doing well when in fact you aren’t. It also veils the fact that you are no longer capable of paying your liabilities. You are simply not to trade under such circumstances.

Should an organization or business entity be found doing so, the Apoilleux team says that consequences will abound. The most brutal of all would be a winding up petition by disgruntled creditors who seeks court action to force an insolvent business to liquidate. Not only does it strip off all power and control form directors but it also puts them under legal consequences and personal obligation if found guilty of purposefully masking the situation. Plus, we should not forget that this will reflect in one’s credit score and history and will mar both the brand and it’s owners’ image.

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Questions to Ask Before Deciding on a Members Voluntary Liquidation

A Members Voluntary Liquidation or MVL is a legal process taken by solvent companies in the pursuit to formally close operations, wind up the business and redistribute its assets, first to creditors then to shareholders and owners.

If you are considering taking on an MVL, below is a list of questions that you must first ask yourself.

Question # 1: Why do I want to liquidate?

There is a reason why an MVL is decided on. The reasons for that are numerous but these should not in any way include debt burdens and insolvency. Some of the most common and valid reasons to it include but are not limited to the following:

·         absence of a qualified successor to overtake and run the company

·         death, resignation or retirement of a significant member of the organization vital to its operations, performance and profitability

·         completion and cessation of the organizations purpose with which it has been built upon

·         wish of directors and/or owners to retire and revert back corporate assets into their personal assets

·         reinvestment purposes as when a company wishes to go on to a different venture using the resources of its existing business

Question # 2: Is the company solvent?

A Members Voluntary Liquidation is not an insolvency procedure. In other words it can only be used by companies who are capable of fulfilling their obligations as they come due, at least within a twelve month period. Because of this, the entity is required to have a statutory declaration of solvency by the firm's board of directors. The same must also come with evidence.

With that said, companies must first take a look and examine its records, financial reports and operations to indeed determine if it is solvent or not. Take note that it should the entity be proven unsuitable to take on an MVL due to its insolvency, a Creditors Voluntary Liquidation will take place instead.

Question # 3: What other options do I have?

A Members Voluntary Liquidation is only one of the many options available for companies out there. To name one, you can always sell your business to an interested party or buyer. All of these options have their own pros and cons. As director and/or owner, it is your job to acknowledge all options and weight hem down one by one to come up with the best and most appropriate decision for you, the shareholders and the creditors.