# What to consider when facing insolvency Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2021-05-07 Category: BUSINESS Category URL: https://financedigest.com/category/business Meta Title: Insolvent Company Liquidation: What You Need to Know Meta Description: Understand the steps involved in liquidating an insolvent company in the UK with tips from licensed Insolvency Practitioners like John Bell at Clarke Bell. URL: https://financedigest.com/what-to-consider-when-facing-insolvencyhtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/insolvency-1736838389658-compressed.jpg) _By **John Bell,** Director of licensed Insolvency Practitioners [Clarke Bell](https://www.clarkebell.com/), which he founded in 1994._ March 2020 will be engraved in our memories and the annals of history forever and thousands of businesses in the UK embarked on a challenging year.  Just over a year later some are now reeling from the impact that the pandemic, its lockdown measures and social distancing restrictions have had on them. Some of these companies may never recover and will now find themselves facing insolvency. This [means they can no longer](https://www.financedigest.com/why-fundraising-no-longer-means-kissing-a-lot-of-frogs.html "Why fundraising no longer means kissing a lot of frogs") cover their daily costs or debts. For some of these companies, [business rescue](https://www.financedigest.com/smishing-is-a-new-virus-plaguing-big-business-conversational-commerce-to-the-rescue.html "‘Smishing’ is a new ‘virus’ plaguing big business – Conversational Commerce to the rescue!") is not a viable option and the best thing to do is to liquidate. John Bell is founder and senior partner at licensed insolvency practitioners [Clarke Bell](https://www.clarkebell.com/) and here he considers the options for a company faced with insolvency and spells out the steps to take next. [**Liquidating an insolvent company**](https://www.financedigest.com/companies-are-empowered-to-retain-control-with-alternative-routes-to-liquidity.html "Companies are empowered to retain control with alternative routes to liquidity") A company that is insolvent is one that is no longer [sustainable and can’t cover its daily costs](https://www.financedigest.com/implementing-sustainable-technology-practices-that-dont-come-at-a-cost.html "Implementing sustainable technology practices that don’t come at a cost"), bills or debts. There are two [tests to determine whether a company](https://www.financedigest.com/lateral-flow-assay-test-market-2021-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Lateral Flow Assay Test Market 2021 Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027") in insolvent, these include: - **The [balance sheet](https://www.financedigest.com/ecb-policymakers-back-jumbo-rate-hike-differ-on-balance-sheet-cut.html "ECB policymakers back jumbo rate hike, differ on balance sheet cut") test:** this measures whether a company’s liabilities are greater than its assets. If this is the case, the company can be classified as insolvent. - **The cash-flow test:** this looks at whether a [company can pay its bills and debts](https://www.financedigest.com/understanding-company-debt-finance.html "Understanding company debt finance") when they are owed. Again, if your company cannot, it can be deemed insolvent. Bottom of Form **What is liquidation?** Liquidating a company refers to the [process under which a company is closed](https://www.financedigest.com/can-digital-labour-displace-cfos-in-the-close-process.html "CAN ‘DIGITAL LABOUR’ DISPLACE CFOS IN THE CLOSE PROCESS?"). This is a procedure that must be carried out by a licensed Insolvency Practitioner. First, the company’s assets are sold and any realisation of [revenue](https://www.financedigest.com/feminine-hygiene-product-market-2021-global-leading-companies-analysis-revenue-trends-and-forecasts-2024.html "Feminine Hygiene Product Market 2021 Global Leading Companies Analysis, Revenue, Trends and Forecasts 2024") is distributed to the company’s creditors. Next, the business is dissolved, meaning it is struck-off the registrar of companies. This is the final stage of the insolvent liquidation process. There are two [paths open](https://www.financedigest.com/innovation-is-the-path-to-revenue-how-financial-organisations-can-open-up-alternative-revenue-streams.html "Innovation is the path to revenue: How financial organisations can open up alternative revenue streams") to an insolvent company going into liquidation, compulsory liquidation and Creditors’ Voluntary Liquidation. **Compulsory Liquidation** One form of insolvent liquidation is compulsory liquidation. This is when a company is forced to close by [creditors who are unable to recover debts](https://www.financedigest.com/sovereign-debtors-creditors-agree-on-steps-to-jumpstart-debt-restructurings.html "Sovereign debtors, creditors agree on steps to jumpstart debt restructurings") they are owed of more than £750. In this case, the creditors can issue a statutory [payment demand](https://www.financedigest.com/what-is-the-eus-stance-on-russias-roubles-gas-payment-demand.html "What is the EU’s stance on Russia’s roubles gas payment demand?") notice, giving a company 21 days to pay back the amount. Alternatively, creditors can go directly to the courts to [issue a winding-up petition by using a pre-winding up demand](https://www.financedigest.com/tesla-investors-to-focus-on-demand-issues-in-earnings-report.html "Tesla investors to focus on demand issues in earnings report") letter (as opposed to a formal statutory demand) to evidence inability to pay, and then proceed with the petition if the debt is not disputed. **What is a winding-up petition?** A winding-up petition asks for a company to be closed, meaning its assets will be sold to raise the [funds to cover debts](https://www.financedigest.com/navigating-the-post-brexit-debt-landscape-opportunities-for-corporate-funding.html "Navigating the post-Brexit debt landscape: opportunities for corporate funding"). Once the winding-up petition has been issued, the company’s [bank account](https://www.financedigest.com/scams-avoided-how-to-prevent-bank-account-scams-in-2023.html "Scams Avoided: How to Prevent Bank Account Scams in 2023") may be frozen. Any other creditors will also have the opportunity to join in on the winding-up petition. It then usually takes about one month after the winding-up petition has been issued for the [court to decide](https://www.financedigest.com/belgian-court-decides-to-keep-eu-corruption-case-suspect-in-detention.html "Belgian court decides to keep EU corruption case suspect in detention") whether the company should be wound up. If it is decided that your [company will be forced](https://www.financedigest.com/companies-climate-disclosures-still-lacking-task-force.html "Companies’ climate disclosures still lacking -task force") to close, it will enter into liquidation, meaning its assets will be sold in order to pay back creditors. The court will appoint a licensed Insolvency Practitioner to [liquidate the company](https://www.financedigest.com/automated-liquid-handling-systems-market-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Automated Liquid Handling Systems Market Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027"). Following liquidation, an Insolvency Practitioner will conduct an investigation into the company to decide whether directors were guilty or wrongful or fraudulent trading. **What options do you have?** If you fail to act quickly, the winding-up petition will go ahead and your [company will be forced to close via compulsory liquidation](https://www.financedigest.com/closing-a-limited-company-three-alternatives-to-liquidation.html "Closing a limited company: three alternatives to liquidation"), the most serious of form of insolvent liquidation. If you [act quickly there are ways](https://www.financedigest.com/four-ways-impact-acts-as-a-source-of-value-for-startups-and-investors.html "Four ways impact acts as a source of value for startups and investors") to stop the winding-up petition. One of these options is a Creditors’ Voluntary Liquidation (CVL), another type of insolvent liquidation in the UK. **Creditors’ Voluntary Liquidation** Although a CVL occurs when a company is insolvent, unlike compulsory liquidation it is a completely voluntary form of liquidation. So, why choose voluntary liquidation? There are many benefits for both directors and creditors using a CVL. This is a good option for businesses that believe they no longer have a [sustainable future and the best option will be to close](https://www.financedigest.com/closing-the-sustainable-investment-gap.html "Closing the sustainable investment gap") their doors. This is a way for [company directors to take control](https://www.financedigest.com/hospital-acquired-infection-control-market-global-leading-companies-analysis-revenue-trends-and-forecasts-2027.html "Hospital Acquired Infection Control Market Global Leading Companies Analysis, Revenue, Trends and Forecasts 2027") of the situation and act before things get any worse. By opting for Creditors’ Voluntary Liquidation, a [business can avoid being forced](https://www.financedigest.com/analysis-uk-crisis-forces-off-kilter-businesses-to-halt-investment.html "Analysis-UK crisis forces ‘off kilter’ businesses to halt investment") into compulsory liquidation. As it is a voluntary process, [directors who want to put their company into Creditors’ Voluntary Liquidation are free to choose which Insolvency Practitioner they appoint](https://www.financedigest.com/impact-com-announces-appointment-of-ning-wang-to-board-of-directors.html "impact.com Announces Appointment of Ning Wang to Board of Directors"). With this option, the director can close the company and always has the option to [open another business in the future](https://www.financedigest.com/the-future-of-open-finance.html "The Future of Open Finance") if they wish. What’s more, their [personal finances](https://www.financedigest.com/personal-finance-strategies-for-saving-and-investing.html "Personal finance: strategies for saving and investing") won’t be impacted. Covid-19 has wreaked havoc on the economy but those directors that take steps to [face up to their financial difficulties and seek professional advice can avoid sleepless nights and make plans for the future](https://www.financedigest.com/smes-facing-an-uncertain-future.html "SMEs facing an uncertain future"). --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---