There are three main types of liquidation: compulsory liquidation, Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation.
Although each option leads to the same outcome, ending with a company being liquidated and dissolved, they are all very different processes. Your situation and circumstances will determine which type of liquidation will be the right one for you.
To help directors understand what form of liquidation is best for them, in this guide Clarke Bell outlines the three main types of liquidation and how each will impact your company.
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Before we look at the different types of liquidation, let’s first look at what liquidation is.
Liquidation is a way of closing a company that still has assets and liabilities to be dealt with. In the process, any assets and liabilities are assessed and redistributing to the shareholders and creditors of the company, as applicable.
This is a formal insolvency process and a Licensed Insolvency Practitioner must be appointed to carry out and oversee the liquidation.
Now, let’s look at the main types of liquidation to help you identify which is right for you.
Also Read: Does a Company In Liquidation Still Exist?
As the name suggests, voluntary liquidation occurs when a company director(s) chooses to wind up and dissolve their company.
It is a process initiated by company directors that must be approved by shareholders.
The outcome of voluntary liquidation is that the company ceases to trade, its finances are wrapped up and it is dissolved whilst, where applicable, paying back creditors what they are owed.
There are two main types of voluntary liquidation – Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL.)
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is a form of liquidation open to insolvent companies, allowing them to voluntarily liquidate.
A company is insolvent if it can’t afford to pay its debts or cover its daily costs.
A CVL is a good option for companies that owe money to creditors and wish to avoid being forced into compulsory liquidation if they fail to pay back their debts.
By entering into a CVL, the director is showing that they are taking proactive steps towards meeting their company’s debt obligations and paying back creditors. This helps to safeguard your reputation as a director and leaves more options open to you in the future, allowing you to open a new company should you choose to.
What’s more, this shows you are acknowledging your legal duties to your creditors and therefore mitigate any risk of wrongful trading.
A CVL is a formal insolvency process and a Licensed Insolvency Practitioner must be appointed to carry out and oversee the process.
Members’ Voluntary Liquidation
The other form of voluntary liquidation is Members’ Voluntary Liquidation. Unlike a Creditors’ Voluntary Liquidation, an MVL is an option open only to solvent companies (i.e. ones with no debts which they are not able to pay).
An MVL is typically used when the company’s assets are worth over £25,000.
A director might choose to undergo an MVL because they are retiring, taking up a PAYE role within the company, moving abroad or have no need for the company anymore.
Members’ Voluntary Liquidation is a popular option for directors as it allows them to easily close their solvent business and free up funds. What’s more, it is a tax-efficient and HMRC-approved way of closing a business.
When closing a company through an MVL, any funds taken out of the business are subject to Capital Gains Tax rather than Income Tax, meaning you will pay just 10% on profits over the lifetime of your business up to a limit of £1 million. This can lead to significant tax savings as it a lot less than the 18% threshold for basic income tax and the 28% threshold for higher ratepayers.
What’s more, there are additional advantages for those that qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief). This is because directors can benefit from a 10% marginal rate on distributions which can also lead to big tax savings.
Find out more about Members’ Voluntary Liquidation and why you would choose this option in our handy guide.
Whereas CVL and MVL are completely voluntary forms of liquidation, compulsory liquidation is when an insolvent company is forced into liquidation.
Compulsory liquidation is initiated by creditors who are owed £750 or more and have had repayment demands gone unfulfilled for 21 days or more. If you receive a winding-up petition, fewer options become available to you than if you voluntary initiated the liquidation process.
Such creditors can issue a winding-up petition to the court which, if successful, can forcibly liquidate the company, and the Courts will appoint an Insolvency Practitioner to do so. In this case, the directors will have no choice over who the liquidator of their company is.
Compulsory liquidation is the most serious form of liquidation and can have many negative impacts on the director.
Professional such as banks, accountants and solicitors will often take a dim view on directors who let their company go into compulsory liquidation. What’s more, your future credit terms from lenders may be badly affected. Finally, business people, from customers to suppliers, may see you as someone who has been complacent about your legal duties as a company director and this might affect your business relationships with them.
For more help with compulsory liquidation and what to do if you have been issued a winding-up petition, check out our handy guide.
Let Clarke Bell help you with the next steps
Having read our guide to company liquidation, the next step is to get in touch with Clarke Bell to see how we can help you.
We offer expert company liquidation advice geared towards you and your circumstances, to ensure the best possible outcome. We will assess your situation to find the best options for you.
Whether you are looking to take control and close your insolvent company through Creditors’ Voluntary Liquidation, or you have a solvent company which you are looking to close in a tax-efficient manner through an MVL, we are here to help.
To see what we can do for you today, or for some free initial insolvency advice, get in touch today.