Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation and Compulsory Liquidation are the three methods used to liquidate a company. Ending with a company being liquidated and dissolved may be the same outcome, but they are all unique processes. Which type of liquidation that is ideal for you will be determined by your situation and circumstances. This article provides company liquidation advice.
In this article, Company Doctor provides company liquidation advice, explains the three primary types of liquidation and how they will influence your company, in order to help company directors determine which one is best for them.
Quick Picks
What is Liquidation?
Let’s start by looking at what liquidation is. Liquidating a company is the process of closing a business while still having assets and liabilities to be resolved. Any company assets and liabilities are evaluated and distributed to the company’s shareholders and creditors, as appropriate, during the process. Once this is done the company ceases and is wound down.
This is a formal insolvency procedure, and the liquidation must be carried out by a Licensed Insolvency Practitioner.
Now, let’s take a look at the types of liquidation to help you decide which one is best for you.
Voluntary Liquidation
Voluntary liquidation occurs when a company director decides to wind up and dissolve their own company.
Voluntary liquidation is the process in which a company’s directors take action after obtaining shareholder approval. The result of a voluntary liquidation is that the firm closes its doors and pays off the company debts, while, where applicable, returning to creditors what they are owed.
There are two types of voluntary liquidation CVL and MVL.
Creditors’ Voluntary Liquidation – CVL
Open to insolvent companies, Creditors’ Voluntary Liquidation is a type of liquidation that allows them to liquidate on their own terms.
If a company can’t afford to pay its obligations or cover its basic expenses, the company is insolvent. A CVL is an excellent choice for firms that owe money to creditors and wish to avoid being forced into liquidation if they fail to pay back the unsecured business debts.
By signing up for a CVL, the director is demonstrating that they are taking proactive measures to fulfil their company’s debt obligations and repay creditors. This helps to protect your reputation as a director while also providing you with additional choices in the future, allowing you to start a new business if you choose.
Furthermore, by confirming your legal responsibilities to your creditors, you are also reducing the potential for wrongful or fraudulent trading.
A CVL is an official insolvency process that requires the appointment of a Licensed Insolvency Practitioner to manage and supervise.
For more information on CVLs click here
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Members’ Voluntary Liquidation – MVL
MVL is the other type of voluntary liquidation process. Unlike a CVL, an MVL is only available to solvent companies (i.e. those with no obligations they are unable to pay).
When the company’s assets are worth more than £25,000, an MVL is usually chosen. A director may opt for an MVL because they are retiring, taking up a PAYE job inside the company, moving overseas, or no longer require the business.
An MVL is a popular choice for directors because it allows them to promptly shut down their solvent business and withdraw funds. It’s also a tax-efficient and HMRC-approved approach to closing a firm.
Any funds taken out of a business when it is closed through an MVL are subject to Capital Gains Tax rather than Income Tax, so you’ll pay just 10% on profits beyond £1 million.
This may save you a lot of money because it’s lower than the 18% threshold for basic income tax and the 28% threshold for higher-rate taxpayers. There are also several benefits for those who qualify for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
This is due to the fact that directors may benefit from a 10% marginal rate on distributions, which can result in significant tax savings.
Compulsory Liquidation
Although CVL and MVL are both entirely optional forms of liquidation, compulsory liquidation occurs when an insolvent company is forced into liquidation.
Creditors who are owed £750 or more and have had repayment demands ignored for 21 days or longer may file for commencement of compulsory liquidation. If you receive a winding-up petition, you can take advantage of fewer alternatives than if you began the liquidation process yourself.
A winding-up order may also be filed by creditors against a company, which if successful, can result in the firm’s liquidation and the courts will choose an appointed Insolvency Practitioner to manage the company’s affairs.
In this situation, the directors’ powers cease and will have no say in who the liquidator of their firm is. This is the most severe form of liquidation and may result in problems for the director.
Directors who allow their company to be wound up in order are seen as unprofessional by experts such as banks, accountants, and solicitors. Furthermore, your future credit terms from lenders may be harmed.
Finally, business people may perceive you as someone who has been complacent in your corporate responsibilities as a director and thus be wary of working with you.
Let Company Doctor help you with the next steps
Having read our guide to company liquidation, the next step is to get in touch with Company Doctor to see how we can help you.
Using an in-house authorised insolvency practitioner. We provide professional company liquidation advice tailored to your needs, to ensure the greatest possible result. We’ll analyze your situation and recommend the best alternatives available.
We can assist you in closing your insolvent firm through a CVL, or in shutting a healthy company in a tax-efficient manner using an MVL.
To see what we can do for you, or some free confidential advice, get in touch today on 0800 169 1536.
FAQs
Can I re-use a company name after liquidation?
Under Section 216 of The Insolvency Act 1986, there are limitations on reusing a name, or a closely similar name, that was previously used by a company that has gone into liquidation. More details on these limitations can be found in the document titled “Re-use of a company name after liquidation” section, published by The Insolvency Service. It is always advisable to seek independent advice.
What should a director do upon becoming aware that a company is insolvent?
It is the responsibility of a director to always operate in the best interests of the company, its creditors, and shareholders. If they persist in conducting business and accruing liabilities when the company is on the brink of, or already in, insolvency, they could face personal liability if the company is forced into liquidation.
What is wrongful trading?
A liquidator has the authority to initiate a claim against a company director for Wrongful trading. This could potentially lead to personal liability for the company’s debts from the point at which it would have been reasonable for the director to conclude that insolvent liquidation was unavoidable, yet they continued to trade regardless.
If my company is placed in liquidation, am I excluded from being a Director of other companies?
A director doesn’t necessarily face an immediate ban from being a director of other companies. Nevertheless, a liquidator is required to report the director’s conduct to the Insolvency Service. If the directors are found to have engaged in misconduct, they could potentially be disqualified, depending on the circumstances.
References
The primary sources for this article are listed below.
Liquidation and insolvency – GOV.UK (www.gov.uk)
Guide to liquidation (winding up) and re-using a company name – GOV.UK (www.gov.uk)
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