Even with the best business plan and careful financial management, business sometimes doesn’t work out.
When a company or partnership falls into financial difficulty is best to focus to do is avoid a cover-up of the financial burden. There are options available, and ideally, one so you can keep trading as a business.
If your business is failing, you may be wondering: how did it get here? What’s worth knowing is not all the reasons to liquidate or go into administration are negative. However, they are options taken by businesses that fail to recover from cash flow problems.
While most potential financial weaknesses in a business are avoided, often, there are a few surprises. It could be a lender changing the loan terms or the promise of more lending canceled. Global events are also hard to prepare for, like a health scare, war, or economic recession.
Every business will experience some financial strain over the years. Most of it will be managed successfully, and when it can not be, and the company is insolvent, there is the need to consider liquidation or administration.
If there is any doubt about the meaning of insolvency, we can clear that up for you. When you’re insolvent – you’re broke! Some insolvent businesses continue to trade, digging a deeper hole. You know your business is in financial trouble when it can no longer pay creditors, which include:
When your business is insolvent, it needs an insolvency practitioner who deals with the receivership, liquidation, and administration processes.
Liquation Versus Administration
According to Salient Insolvency, an insolvency practice operating throughout the UK, 1 in 386 companies will enter into liquidation over their lifetime – where they will cease trading formally. Let’s look at what it means to go into liquidation or administration.
The term liquidation essentially means that the assets of a business are sold for their cash value, i.e., they are liquefied. Once all of a company’s assets have been liquefied, the company can be dissolved.
Limited companies, will be struck off the Companies House registration however it can also be restored under the law of the Companies Act 2006.
For example, not all companies that are stuck off are insolvent. A solvent company can be struck off when a business is being wound down by its owners as they no longer want to run it. Not all businesses are sold when owners no longer want them. One reason is the owner is retiring and doesn’t want to sell it as a going concern. Another cause for solvent liquidation is when a business owner wants to concentrate on a new venture instead of their old enterprise.
If creditors have applied for the liquidation of a firm that owes them money, they’ll need to show it is insolvent and cannot discharge its debts from its working capital. This sort of insolvent liquidation tends to be called a creditors’ voluntary liquidation or CVL.
A licensed insolvency practitioner will need to be appointed to deal with liquidating any assets the company still has and apportion payments to the creditors accordingly.
Similarly, company administration proceedings are sought by directors when there is a chance that the business might be saved, but they no longer want it. Or another reason for going into full or partial administration is when say, an asset-rich company needs to secure some investment to make it more competitive. They sell off the areas of the business they no longer want. To attract investors, company administrators might be brought in to jettison unprofitable parts of the business so that those that function correctly are attractive and worth growing for more profitability.
One of the key advantages of going into administration is that there is a moratorium period that follows it in which legal action against the business is restricted. This can give viable enterprises the breathing space they need.
However, the firm will need to be run by official administrators while reorganized.
Going into liquidation or administration is not always a result of adverse events like the business is failing. Suppose you’re carefully managing your finances with forecasting and plans. In that case, you’ll only need to liquidate or go into administration for good reasons like selling up or taking the business in a different direction.
Expert advice should always be sought before choosing either of these routes for your business.