When you ask any business owner or entrepreneur about the things they fear the most, a winding up petition procedure is sure to come up one way or another. But what’s in it that makes them cringe? What consequences does it exactly bring?
A winding up petition is first and foremost a procedure initiated by disgruntled creditors (individuals, organizations or legal representatives thereto) towards a debtor company after having repeatedly tried and failed to collect what is owed to them. This is taken out only for entities that are deemed insolvent and those that can no longer serve to fulfill their liabilities for at least a period of twelve months. Because it is creditor instigated, they shall bear the expenses of such act.
The said petition shall then be reviewed by court and if deemed valid, an order shall be released forcing the entity to wind up and liquidate whether it wants to or not. There are many consequences that come with it for the business in question. Below are some of them.
All bank accounts are frozen. To avoid unlawful withdrawals and the prevention of unjust reduction in the amount of assets to be paid out to creditors, the company’s accounts are to be frozen preventing any form of movement or pulling out.
Any sale of property is deemed reversible. The sale of fixed assets for purposes other than the liquidation and distribution to creditors shall be deemed invalid and are reversible under the law for the same reasons as the freezing of bank accounts.
Directors lose control over the business. The choice of the liquidator shall be reserved to creditors or the court itself. The directors and officers shall be stripped off of their control over the entity.
Personal liabilities are likely. Should it be proven that there was deliberate intent to avoid liquidation and continue to trade under insolvency, the board and owners may be held accountable up to their personal assets and may face legal consequences.
Operations and trading are ceased. The company can no longer trade and operate except if it were allowed by the court and for purposes of liquidation.
The insolvency shall be reflected in the credit score. Once a winding up petition procedure has taken place, the business’ credit score or standing shall reflect it and will potentially leave a stain and permanent mark.
The sound of a “Creditors Voluntary Liquidation” can sting and cut deep. A threat itself or even the slight possibility of it can bring distress to business owners, entrepreneurs and investors. This is because a CVL can bring about total demise and winding up of the entity for good.
By definition, a Creditors Voluntary Liquidation or CVL is a legal process initiated by directors of an insolvent company themselves which seeks to wind up the business after having concluded that the entity can no longer meet its maturing obligations as they become due. Such decision stems from various reasons. Take note that an entity cannot legally continue trading under full knowledge of the insolvency otherwise directors may be held accountable up to personal obligations and a winding up petition at court may be summoned by creditors. In that case, consequences and losses tend to pile higher. A CVL is the lesser of two evils and is a formal way for the business to gracefully accept loss instead of faking it and committing fraud in the process.
There are many ways for any business entity to avoid a Creditors Voluntary Liquidation altogether. We’ve got some of them listed down and these are so simple, you are sure to address to them without hurting a limb.
See to it that you manage your credit well. Monitoring of all your liabilities and obligations is a major task that helps in ensuring that you do not take more credit than you are capable of. Plus, this helps you keep track of how much you will have to allocate for them and when. This eliminates all risks of displeasing your creditors.
Put the right people on the job. Losses, mistakes and wrong decisions can be minimized if not foregone by assigning the right people and talents for every job position in your organization. The reasoning behind this is pretty obvious. Every company is only as good as its employees.
Ensure report validity. All financial statements and reports have to be accurate for them to be able to reflect data that will aid in the decision making. At the same time, their availability must be timely otherwise their purpose will be completely futile.
Maintain good relationships with all your creditors. In business, networks are important and with that come the importance of being in your creditors’ good graces. This does not only pertain to paying your dues on time but also it spills over to corporate and professional amity.
Simple, right? You’ll have to do all of these and more to ensure that a Creditors Voluntary Liquidation is well kept at bay. Get professional help at www.aabrs.com
When you hear the word retirement, what often comes to mind? More time with the family, travelling the world, settling on a beachside estate or going uphill and enjoying the fresh air? Okay, maybe you want all of those and we don’t blame you. After years of hard work, blood, sweat and tears, we all deserve good, happy, relaxing, comfortable and secure years for retirement. But unlike regular employees, business owners cannot simply say they want to retire. There’s a process to be dealt with and that is called a Members Voluntary Liquidation.
A Members Voluntary Liquidation or also referred to in its acronym as the MVL is a liquidation procedure that seeks to formally close down a solvent company, wind up its operations and redistribute all of its assets to its shareholders and owners. To have one on the roll, the company must first file and prove its solvency or its capacity to fulfill all of its obligations as they mature for at least twelve months. This is to ensure that the MVL is not used to escape liabilities. It’s also a means to protect the corporate creditors.
Apart from retirement plans, other reasons and situations may also lead to an MVL. One would be for purposes of investment. Owners and shareholders may wish to put their money someplace else or put up another business. It could also be due to the completion of objectives or the cessation of the organizations’ purpose. The death, loss, resignation or retirement of a vital member of the organization which greatly affects operations and profitability may also lead to an MVL for purposes of avoiding future consequences and losses that could arrive out of it.
Liquidations even for solvent and fully operational entities can become really stressful. As a matter of fact, it will involve a lot of paper work, meetings with shareholders and creditors and many more. This makes it a great idea for owners and directors to hire the services of a qualifies liquidation practitioner who will not only guide you through and make you understand the Members Voluntary Liquidation process but also be the one to liquidate the assets, hold the necessary meetings, find a trusted appraiser to safeguard asset value and manage tax affairs among others. You deserve that amazing retirement and for you to truly enjoy it, you must first formally close the company properly.
A winding up petition at court is the least thing that entrepreneurs and business owners would want to greet them first thing in the morning. It’s like smelling bacon, eggs, pancakes and brewing coffee then heading to the kitchen to realize that it’s the neighbors and you are seriously late for work. Plus, you’ve got a dead tire. Awful would be an understatement. But what exactly does that petition do? Read on up to get a clearer picture of things.
By definition, a winding up petition at court is brought about by disgruntled creditors after having exhausted other possible means of collecting the debt that is owed to them by a company. In most if not all cases, such is the last resort for creditors given that much of the filing and other relevant costs will be borne by them. It is a process enacted by a court order that forces the debtor company to liquidate wherein proceeds are to be distributed to the creditors in proportion to their interests if not in full.
As for the debtor company, the effects of a winding up petition at court can be hugely detrimental and we’ve listed these below for your perusal.
It puts your bank accounts on freeze. – The company cannot anymore release dividends or distribute profits, if any, to its owners and stockholders. If any, only amounts that are related to the liquidation are allowed to be spent.
It forbids any form of asset transfers. – The company can no longer sell off any of its fixed assets and properties in whole or in part. All that will be liquidated with proceeds given to creditors. Any sale made is reversible and are deemed invalid by the law.
It can put owners and directors personally liable. – If proven that owners and directors failed to put creditor interest before theirs, they can be made liable and can pay the latter up to their personal assets.
It puts the business in liquidation whether it wants to or not. – Once the winding up petition at court has been released with a court order, the debtor company will have no other choice but to cease operations, stop business and close shop. It will have to liquidate all of its assets and all proceeds including any other corporate liquid funds for distribution to the creditors.
Insolvency in its simplest sense is a state where an entity cannot anymore fulfill its obligations or in short its debts. There are so many things that it can bring to a business should it choose to rear its ugly head and the expert team at AABRS.COM is here to help us understand them and hopefully guide us to making better decisions to minimize its fatal consequences.
Whether or not an entity is insolvent can be measured in two ways or tests as follows:
The balance sheet test pertains to when the liabilities in the financial statements exceed the amount of assets that the company has at a given period, while
The cash flow test is when the outflows are greater than the inflows of cash.
In both instances, it can be deduced that the company does not anymore have the capacity and the resources to repay their debts and should therefore consider options to fix that and even the dreaded liquidations.
The effects of being insolvent are quite numerous and below are a few of these:
Budget Cuts – In order to save up for the needed payments, the corporate budget may have to be cut and certain expenditures and projects may be reduced if not scraped out altogether.
Employee Layoffs – Another effect of insolvency could be the laying off of employees which is in relationship to budget cuts. Duties and responsibilities may have to be redistributed.
Creditor Relationships – When an entity cannot fulfil its liabilities on time, it not only increases its interest expenses more but it also tarnishes the relationship with your creditors. You will tend to have a poor rating on your credit grade and history. Plus, lenders will be unlikely to lend to you in the future.
Vendor Credibility – Likewise, your suppliers and vendors may be apprehensive to allow you to order and purchase from them on credit.
Personal Liabilities – On the side of directors, they might be held liable up to their personal assets too if proven guilty of breaching and not following suit with their responsibility of putting creditor interest before everything else.
Cessation of Business – The last and the most fatal consequence here would be the cessation and closing down of business. This can either be through voluntary means or through a forced winding up petition issued by court as brought about by disgruntled creditors.
So when insolvency is looming, AABRS.COM advises entities to act on it quickly and cautiously.
A Member’s Voluntary Liquidation (MVL) is called for by a solvent company that wishes to cease and wind up operations. By solvent this means that the entity is still able to meet its financial obligations for a foreseeable future. It is still operational and thus can still be earning sales and profits. In short it is “not” bankrupt. But why should a fully operational and profitable venture choose to close down?
Majority of the public believe that the only time for companies to close down and liquidate is when it becomes insolvent, bankrupt and broke. Contrary to this popular belief, not all liquidations are caused by the inability to repay debts. Should this be the case then a Creditor’s Voluntary Liquidation will be done instead. So let’s cut to the chase, when is an MVL often called for?
CASE # 1: RETIREMENT OF OWNERS OR DIRECTORS – There are cases when the owner as in the case of a sole proprietorship, partners as in the case of partnerships or directors as in the case of corporations would want to retire, close the business and receive their appropriate shares. An MVL is often an option here.
CASE # 2: ABSENCE OF HEIR OR SUCCESSOR – This is fairly common in family owned and run entities. There are instances when there is no successor either because the owners had no children or the children have tread on other ventures and occupations. An MVL s used to liquidate the assets oftentimes providing for the retirement of the parent owners.
CASE # 3: CESSATION OF ENTITY’S PURPOSE – There are many companies that have been established to serve a very specific purpose. Should this purpose be met completed or cease to exist then the business will have no more reason to continue with operations and since it is still solvent then an Member’s Voluntary Liquidation is necessary.
CASE # 4: COMPANY DISPUTES – Another is when there arises a dispute between directors and shareholders making it hard for the business to continue peacefully and professionally. If a team does not work then it becomes hard to meet goals.
CASE # 5: RECONSTRUCTION OF THE BUSINESS – There are also cases when the business has to return its excess capital to its shareholders through a capital distribution. To minimize excessive amounts of personal income tax and to aid in reconstruction of the entity, the Member’s Voluntary Liquidation or MVL may be used.
A Pre-Pack Administration is one of the many business recovery options available to companies who are facing financial difficulties and who are facing a possible need to liquidate in the near future. What separates a prepack from other methods of its kind is the fact that it does not seek to close down or liquidate the business but rather it seeks to reconstruct the company so that it can possibly recover and ultimately proceed with operations smoothly and better.
In a Pre-Pack Administration, part of or the entire entity is sold to a third party or even to one of the directors themselves. The company is then operated and held under a new management. In essence, it has been defined as a restructuring procedure that involves the sale of a company’s business, together with its assets, on a going concern basis.
For those entities who find themselves at a standstill atop a tightrope where the fall is deep and the finish line quite foggy and uncertain, a prepack can be a solution to help work things out. Why so? Read on.
First, a prepack does not liquidate the business. Again as mentioned earlier, it is sold under a new administration or management wholly or partially. Of course, this only means that the company does not have to close down and cease operations. Its going concern is strengthened and its life lengthened.
Second, employee layoffs are lowered down if not eradicated. Imagine if the company does liquidate. Everyone loses their jobs. In many pre-pack administration procedures, there could indeed be a few layoffs but such is something that the management can work with. Jobs are spared and saved.
Third, most creditors prefer this business recovery procedure. And now you wonder why. Wouldn’t they be happy to see the debtor company sell off its assets and have its proceeds distributed to the respective creditors? Maybe they do but that does not assure that they get to collect the amount due to them in full. What if they don’t get anything at all? Plus setting up a petition at court for a forced liquidation is a lengthy and expensive process. When the debtor continues operations and persists to recover, they have more chances at getting paid in full plus any interests that may be validly applicable.
A Pre-Pack Administration is indeed a beneficial business recovery option. You might want to consider it and add it to your list of options.
A relatively new business recovery option for many companies today refers to what we call the Pre-Packed Administration. In fact the use of such has been growing as many entities deem it a better choice in contrast to liquidations. Why so? Let’s figure it out together below.
A Pre-Packed Administration or more commonly referred to as pre-packs refer to the series of procedures and processes by which the business, it’s assets, liabilities and equity, in whole or in part are sold to a new management or administration to further its going concern. It is a kind of restructuring procedure to protect the assets, interests and employees of a company that might go insolvent or are in great financial turmoil.
Now why are pre-packs a better option? Read about its benefits as listed below:
It allows for the entity to continue its operations without disruptions as the change that occurs only involves the management. When the entity goes under liquidation, it can be loud and public. Pre-packs are less of a headline.
Depending on the new administration, as many jobs can be saved if not all. Imagine if the company liquidates, no job will be spared and everyone is laid odd. Under pre-packs there is less to no lay-offs although some staff may be transferred from one department to another as deemed necessary.
Creditors prefer this choice as they will be provided with a better return. If the entity becomes insolvent and its assets sold, the payment of the whole debt cannot be ascertained. Also creditors would want to salvage as much as they could and if you continue business, you have a better chance to pay them off.
Relationships between customers and vendors or suppliers can also be saved. There is less loss on confidence from them of the company.
It gives the organization a chance to redeem itself, continue operations and make business boom under new minds and new management. There is a room for improvement, an area for growth and a chance at success.
When the troubled organization needs funding to save the business, pre-pack administrations can provide it and since the purchase of the entire business is not necessary and buying only a part of it can be feasible, this is a good solution.
So is a pre-pack administration the best option for your corporate dilemma? It could be but it would be advisable to talk to your league of experts to better weigh all your options.
Whether you are a concerned creditor, a worried employee, a curious public eye or the owner of the business itself, it is important for you to know the illuminating signs of a possible insolvency. You have to be aware so you will know how to act on it, what the best course of action is, will you still have anything to about it or is it a gone deal and how you will protect everyone’s interests best. To help us with this, AABRS experts have given us a list of this red flag signs that will help tell if a company is insolvent or is approaching to be one.
First and foremost, let us define insolvency. It is where an organization or individual cannot anymore meet its financial obligations when they mature or become due. In simple terms it is the inability of a debtor to pay their debts or in this case the inability of the company to pay their liabilities. There are actually two kinds to it:
CASH FLOW INSOLVENCY is where the company is not liquid enough to pay their debts when they become due.
BALANCE SHEET INSOLVENCY is where the liabilities exceed the assets as seen in the financial statements.
Now how do you tell if a company is insolvent? Here are four of the many signs:
A delay in or complete inability to pay tax liabilities is one clear factor. This can entail that the business does not have enough resources or is not liquid enough to produce payment. Sometimes this can be attributed to employee fault but if it happens a lot of times and consecutively then be wary.
Bounced checks are another. It is unlikely for businesses that are doing good to issue one. They will always see to it that such occurrences seldom happen or do not happen at all. Why else would their accounts be zeroed out?
Employee layoffs are another. One of the most basic actions that businesspeople do in a looming insolvency is cut on costs in order to lessen disbursements. Cutting down on the labour force and passing their tasks to another’s job description is one clear sign.
Poor documentation and record keeping is part of our list. When everyone is so concerned at keeping their heads above the water, they tend to put filing and document organization at the bottom of their lists. These are unintentional but there too are those who do it intentionally to confuse and bury the problem.