Asset Liquidation for Debt Repayment

Understanding Liquidation.

Liquidation is a legal process which is initiated when a company becomes insolvent and cannot pay its debts, or when a healthy company is no longer needed.

There are two main types of liquidation:

Voluntary liquidation: initiated by company directors and shareholders. In the case of an insolvent company a Creditors’ Voluntary Liquidation (CVL) is usually appropriate. A Members’ Voluntary Liquidation is often a good option if the company is healthy but has outlived its usefulness.

Compulsory liquidation: Compulsory liquidation is normally initiated by creditors through a court order.

The main purpose of insolvent liquidation is the repayment of creditor debts through the process of asset liquidation

The Liquidation Process.

1. Appointment of Insolvency Practitioner

In order to carry out the liquidation an Insolvency Practitioner must be appointed to carry out the process. This is a legal requirement of all liquidations. Their role will be to oversee the liquidation from start to finish, selling assets, distributing funds to creditors and, where possible, to shareholders and ensuring legal compliance.

2. Asset valuation and inventory

The Insolvency Practitioner will create an inventory of all your company assets. These assets can include property, machinery, vehicles, investments, and inventory.

Often professional third-party appraisals are obtained to determine the fair market value of each asset, to ensure an accurate valuation.

3. Asset sale

Your company assets can be sold through various channels depending on their type and value, this is the process of asset liquidation.

Common methods of sale include auctions and private sales.

If there is property involved, then this will be sold through estate agents. Machinery and large-scale equipment can be sold through industrial auctions.

4. Distribution of proceeds

The Insolvency Practitioner will use the proceeds of the asset liquidation to repay your company’s creditors.

There is a strict order in which your company’s creditors will be paid in line with the legal requirements of liquidation.

• Secured creditors: All creditors with fixed charge security over the company assets are paid first after asset liquidation. This includes lenders with mortgages.  If any debt is secured by a floating charge, the creditor will receive a proportion of the funds remaining after the preferential creditors have been paid.
• Preferential creditors: Certain claims of employees and certain taxes.
• Unsecured creditors: Suppliers, customers, and other unsecured creditors.
• Shareholders: If there are any remaining funds these will be distributed to shareholders. This is rare in the case of insolvent liquidation.

This is a basic overview of the liquidation process. To see the full insolvent liquidation process visit our Creditors’ Voluntary Liquidation page.

Challenges with Asset Liquidation.

• Asset depreciation: leading up to or during the liquidation process your company assets are at risk of depreciating in value. This can result in lower proceeds than expected.
• Market conditions: The state of the market can affect the speed and value of your company asset sale. Periods of economic uncertainty can lead to low sale prices.
• Complex assets: Intellectual property and other complex assets often require specialised valuations and sale processes.
• Legal and administrative costs: There are costs associated with liquidation including the fees of the Insolvency Practitioner as these fees are deducted from the proceeds first the remaining balance available for creditors after asset liquidation is reduced.