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 2021 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. The three main types of company liquidation are:
Compulsory liquidation is where a company is forced to liquidate and close. This occurs when creditors who are owed £750 or more and have had repayment demands gone unfulfilled for 21 days, take the matter to the courts.
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 a very serious form of liquidation that can have a range of negative effects on the director.
As a result, it is advisable to try to avoid your company being placed into compulsory liquidation.
So, why would you let your company go into Compulsory liquidation?
Given the drawbacks associated with being forced by creditors to liquidate your company, there are no good reasons to let it happen.
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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 voluntary liquidate and close their company.
So, 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 meeting their company’s debt obligations and pay back their creditors, where possible.
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. It also means that more options will be open to them in the future, such as opening another company if they wanted.
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 round.
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. If you fail to act quickly, 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 is only open to solvent companies – i.e. ones which have no debts.
An MVL is typically used when the company has assets of £25,000 or more.
So, 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 any funds taken out of the business through an MVL are subject to Capital Gains Tax which is set at a rate of 10%, rather than Income Tax which is 28% at the higher band.
What’s more, there are further tax benefits available to entrepreneur’s that are eligible for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief).
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.
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.