A term that can be applicable for individuals and companies, insolvency refers to a situation wherein an entity becomes incapable of paying off debts. It can also be used to describe when that entity’s liabilities exceed its assets. If you are a business, applying for and undergoing a company liquidation is one of the solutions to address insolvency.
In this article, we’re giving a comprehensive discussion about the things you need to know about this process.
What Causes Insolvency
Running a business is not just about attracting customers and making profits. It is also about managing risks and resolving several issues that can harm the company’s operations.
While some companies manage to survive — and thrive — in the market, there are those that are forced by certain circumstances to admit insolvency and undergo company liquidation. There are different reasons for this matter.
One of the main culprits is experiencing late payments from customers. As customers are your major source of income, a delay from your receivables can cause a major setback on the overall financial capabilities of your company. Another is when a major supplier or customer also undergoes insolvency and therefore becomes unable to meet their financial obligations.
When there’s an increase in competition, it can also cause you to lose customers and decrease your opportunities to make profits and pay off liabilities. The same is the case when the market where your business belongs to faces a crisis — players who are not that financially stable are most likely to fail and become incapable of repaying their debts.
In some cases, insolvency can be attributed to incompetent company directors — specifically, their acts of misconduct or lack of abilities to make sound decisions for the company.
Voluntary vs. Involuntary Insolvent Liquidation
When the company directors realize that the business won’t be able to meet debt obligations — they can pay off creditors by declaring insolvency and doing voluntary company liquidation (VCL). VCL is a term coined to the liquidation process that is initiated by someone within the organization.
Involuntary liquidation, on the other hand, refers to when it’s someone from outside who wants to have the company liquidated. In most cases, involuntary liquidation is requested by the creditors from the court.
In the former, the company directors have the liberty to choose the insolvency practitioner who will handle and oversee the whole liquidation process. In the latter, it is the court that appoints.
Either way, the main goal of liquidation is to bring a business’ operations to a halt and sell their company’s assets in order to pay all financial obligations. It is a way to stop creditors from chasing after the company and even threatening its roster of directors.
Why Opt For Voluntary Insolvent Liquidation
As mentioned, VCL gives company directors more freedom — especially in terms of choosing the insolvency practitioner. Apart from this one, the benefits of this type of liquidation also includes:
The sale of assets are generally limited to the assets of the business (not the personal assets of the directors)
The procedure is more cost-effective
The whole process can be done efficiently while prevent creditors from posing threats to the directors
After the liquidation is done, liabilities, lease/purchasing contracts, and any legal actions will be written off and halted.