Making the decision to liquidate a company isn’t an easy one. Of course, it’s difficult to wind down a company you’ve worked hard to build up, but there are also practical challenges and situational factors to consider. For example, when is the best time to liquidate a company, and what options are available? The latter question is straightforward to answer. There are three main types of company liquidation, and the best one for you and your company will depend on your particular circumstances.
If you are considering liquidating your company in 2023 and you want to know more about the process, and when is the best time to liquidate your company, Clarke Bell has put together this handy guide.
What is liquidation?
Liquidation is a formal way of closing down a company. While the three main types of liquidation are similar in some areas, namely, resulting in the closing of a company and its removal from the Companies House register, there are several key differences. The three main types of company liquidation are:
Compulsory liquidation
Compulsory liquidation is where a company is forced to liquidate and close. It is an involuntary form of liquidation, and can be initiated by creditors who are owed £750 or more and have had repayment demands gone unfulfilled for 21 days. Creditors that fit this criteria can take the matter to the courts, which will consider the case and decide on further action.
Creditors will typically leave this course of action as a last resort, with several other actions being taken before this point. They will usually attempt to contact a company’s directors to inquire about the debt, and will often do so several times. If contact cannot be established, or the directors of the company in question are uncooperative, then dissatisfied creditors may turn to means of debt recovery. This could mean sending bailiffs to the company, or even High Court Enforcement Officers. If the situation is still unresolved after doing so, creditors may choose to escalate the situation further and petition the courts to force the company into compulsory liquidation.
Creditors’ petition
After receiving the creditors’ petition, the courts will then decide whether or not to take action. Assuming they approve of the creditors’ case and agree that compulsory liquidation is the right solution, the courts will then issue the business with a winding-up petition. If successful, the company can then be forcibly liquidated. In this case, the courts will appoint an Insolvency Practitioner to liquidate the business, and the director will have no choice over who the liquidator of their company is. This is in contrast to other forms of liquidation that allow directors to appoint an insolvency practitioner of their choosing.
Compulsory liquidation is a very serious form of liquidation that can have a range of negative effects on the director. These negative effects come in the form of penalties imposed by the Insolvency Service, which will decide which are appropriate based on the severity of the case at hand. These penalties can include:
- Disqualification of a director’s license for 2-15 years. This includes a ban on holding management and senior positions in companies the director in question does not own.
- Fines, with the sum being decided largely on the actions taken by a guilty director.
- Personal liability for company debt.
- An order to repay the company a specified sum. This is typically done if the director is a recipient of an unlawful dividend.
- Prison sentence.
Due to the above consequences, it is advisable to try to avoid your company being placed into compulsory liquidation.
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Why would you let your company go into Compulsory liquidation?
Given the drawbacks associated with being forced by creditors to liquidate your company, it can be easy to think that there are no good reasons to let it happen. This is undeniably true for all but the most fringe of cases. Such cases can refer to directors of dormant companies that are not in debt, but have failed to submit their accounts on time. Leaving the company alone will see it placed into compulsory liquidation, which can be helpful for directors that want their companies wound up. However, it is still best that you take the time to place your company into a voluntary liquidation procedure, to avoid exposing yourself to any unnecessary risk.
If you are unable to find the money to pay back those creditors, you should speak to an Insolvency Practitioner about voluntarily liquidating your company. Nowadays, there are a lot of good Insolvency Practitioners who provide a low-cost, fixed-fee liquidation service.
Having discussed your situation with an Insolvency Practitioner, if there is no other option, then Compulsory liquidation may be the final resort.
The other two types of liquidation, on the other hand, are both voluntary types of liquidation.
Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation (CVL) is an option that is open to insolvent businesses, which allows them to voluntarily liquidate and close their company. It offers insolvent companies, that is, companies that cannot repay their debts, an efficient means to close down. In addition to this, the CVL procedure offers several key benefits that we will discuss later.
Why would a business opt for Creditors’ Voluntary Liquidation?
A CVL is an option for companies that owe money to creditors and want to avoid being forced into compulsory liquidation if they can’t pay their debts.
The CVL process allows the director of the company to take control of the situation and take proactive steps to meet their company’s debt obligations and pay back their creditors, where possible. Directors will be able to appoint an insolvency practitioner of their choosing to the role of liquidator. While in this role, the liquidator will take control of the company, identifying assets and selling them off for as high a price as possible. The proceeds raised will then be distributed amongst company creditors according to a repayment hierarchy. Any debts that remain outstanding once all possible distributions have been made will be written off, unless a personal guarantee secures them.
The CVL process grants an additional benefit for companies with dissatisfied creditors. Namely, the company will be protected from legal action once the procedure begins. This will essentially protect the company from being served a winding-up petition and facing compulsory liquidation.
Although the CVL results in the company being liquidated and closing, it does show that the director has acknowledged their legal duties to creditors and therefore is unlikely to be accused of wrongful trading. Even if such an accusation is made, the directors’ decision to close using a CVL is a strong argument against misconduct allegations. They have demonstrated initiative and acted on behalf of the creditors, making it difficult for misconduct accusations to carry weight in court. It also means that more options will be open to them in the future, such as opening another company if they want.
When would you put your company into Creditors’ Voluntary Liquidation?
Directors of a company would appoint an Insolvency Practitioner to put their company through the CVL process when their company is insolvent, and there is no way of turning things around.
If your business finds itself in any of the following situations, it might be time to consider liquidation:
- A winding-up petition is being threatened against you or has been presented to you
- The business is no longer viable
- The business can’t afford to pay employees’ wages
- Action is being taken by those owed money by the company
If any of these are the case, it could be time to consider Creditors’ Voluntary Liquidation, before things get any worse. Fail to act quickly and it might be the case that your company is forced into liquidation. As we have talked about, this is the most serious form of liquidation and can have a range of negative impacts on the director.
With a CVL, the directors can close down their company and have a fresh start – whilst meeting all their legal obligations as directors of an insolvent company.
Members’ Voluntary Liquidation
Unlike a Creditors’ Voluntary Liquidation and Compulsory liquidation, a Members’ Voluntary Liquidation (MVL) is only open to solvent companies – i.e. ones that have no debts. It is a particularly effective procedure for companies with large retained profits. This is because MVLs are incredibly tax efficient, and can help large companies save a significant amount when it comes time to wind down operations and realise the capital held within.
An MVL is typically used when the company has assets of £25,000 or more.
Why would a director choose an MVL?
An MVL is HMRC-approved and is a popular option because it allows directors to easily close their solvent business and free up their funds in a tax-efficient way.
The main advantage of closing your solvent company with an MVL is that it allows you to close your business in a tax-efficient way. This is because the MVL procedure allows companies to have their gains taxed under Capital Gains Tax (CGT) rates, rather than the usual Income Tax rates. As a result, companies will save a fair amount on their tax bill, as CGT is the cheaper of the two.
For some companies, however, the savings won’t stop there. Eligible directors can apply for Business Asset Disposal Relief (BADR), previously known as Entrepreneurs’ Relief, as part of the MVL process. This will allow directors to save even more, as BADR combined with CGT rates can reduce a tax bill down to as little as 10%.
For company directors, this is a great opportunity to save a small fortune on their tax bill and is one reason why choosing to close your business through an MVL is such a popular route.
When would you put your company into Members’ Voluntary Liquidation?
A director would use the MVL process when they no longer need their company – e.g. due to retirement, taking up a PAYE role, or emigrating – and they want to extract the money from the business.
Company dissolution – an alternative to liquidation
For some companies, the three liquidation procedures we have discussed so far simply won’t be an effective option. This could be the case for small solvent companies that don’t require a CVL, but don’t have enough retained profits to justify the cost of an MVL. For such companies, a strong alternative exists – company dissolution.
Dissolution, also known as a strike-off, is a voluntary procedure directors can use to wind-up their companies. It is incredibly cost-effective, requiring the filing of a DS01 form that costs £10 if done in paper format or £8 if done through the online portal. Once approved, directors must then publish a notice of their intentions to dissolve their company in the local Gazette. This grants third parties, such as outstanding creditors, the chance to object to the procedure.
While this won’t be an issue for solvent companies, insolvent companies attempting to sneak through will likely be caught out. For such companies, the attempted dissolution will be halted, and directors may face penalties for attempting to flee from debt. If your company is insolvent, attempting dissolution is not worth the risk. It is highly advised that you use another method of closing a company, or seek professional assistance for a different solution.
Assuming no objections are made, directors can begin to remove assets from the company and empty its accounts. This can be done by selling the assets, transferring ownership to another company, or any other legal method. However, any assets that remain legally owned by the company once it is dissolved will be considered “bona vacantia”, or without an owner. Assets with this classification will then be transferred to the Crown.
Considering liquidating your company? Clarke Bell can help you
Whatever situation your business is in, whether it is insolvent or solvent, we can help you with the liquidation process.
We offer expert company liquidation advice geared towards your situation, to ensure we reach the best possible outcome for all parties.
Whether Creditors’ Voluntary Liquidation or Members’ Voluntary Liquidation is right for you, we will work with you closely to assess your situation and find the option that’s best suited to you.
To see what we can do for you, get in touch today to talk through your case and get some free, initial advice.
