There are several ways a company can be liquidated. From compulsory liquidation, which is forced onto a company, to voluntary liquidation which includes Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation.
Although each of these options ends with the company being liquidated and dissolved, they are very different processes with their own advantages and drawbacks.
In this guide, Clarke Bell looks at the three forms of liquidation and how each one will impact your company, so you can find the best next steps for you.
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What is liquidation?
Liquidation is a way of formally closing down a company and a licensed Insolvency Practitioner is required to be appointed to carry out the process.
As we have mentioned, there are several types of liquidation. Now, we will look at each in more detail.
The compulsory liquidation process
As the name suggests, compulsory liquidation is forced upon a company by creditors who are owed money. If your business goes into compulsory liquidation then you, as the business owner, will have almost no control over the process.
Creditors that are owed a sum of £750 or more and have had several repayment demands unfulfilled can issue a winding-up petition to the court.
Once a winding-up petition has been issued, it will be served to the company and advertised in The Gazette 7 working days later. The court will then either approve or dismiss it.
If successful, the court can force the company into liquidation, which will be carried out by a licensed Insolvent Practitioner the court appoints. With a compulsory liquidation, the company directors have no control over who is appointed to liquidate their company.
For this reason, if your company is facing insolvency or financial difficulties, it’s always better to act quickly to ensure that more options remain open to you – such as voluntary liquidation.
The voluntary liquidation process
Unlike compulsory liquidation, voluntary liquidation is a completely voluntary process that is initiated by company directors and shareholders.
Next, we will look closely at the two types of voluntary liquidation.
Creditors’ Voluntary Liquidation (CVL)
To prevent compulsory liquidation, a Creditors’ Voluntary Liquidation could be an option. Here, the director of a company chooses to voluntarily end the business and liquidate all of its assets.
This is a route taken by insolvent companies, meaning those that are no longer viable, can’t pay their debts, bills or cover daily costs.
As a formal insolvency process, a licensed Insolvency Practitioner must be appointed to carry out and oversee the CVL.
There are many benefits to this route. One advantage is that it shows that the company director has taken proactive steps towards meeting their debt obligations and paying back creditors.
By undergoing a CVL, the director is taking ownership and showing that they acknowledge their legal duties to creditors, therefore mitigating any risk of wrongful trading. What’s more, following a CVL, the director can choose to open a new company in the future.
Perhaps the main benefit of entering into Creditors’ Voluntary Liquidation, however, is that it allows you to avoid being forced into liquidation, from which fewer options are open to you.
If a CVL is not the best way to deal with your company’s financial problems, we will advise you on the alternatives – e.g. a moratorium and Company Voluntary Arrangement (CVA) to help get a company through the Covid-19 crisis or Administration.
Investigations by the Insolvency Practitioner
In both types of insolvent liquidation, the appointed Insolvency Practitioner will conduct an investigation into the company’s transactions.
If any evidence of wrongdoing is found, it will be reported to the Insolvency Service and could lead to fines or a director’s disqualification. And, if wrongdoing is discovered, the director can become personally liable for any debt.
Members’ Voluntary Liquidation (MVL)
The final form of liquidation is only for solvent companies and is a Members’ Voluntary Liquidation (MVL).
A company is solvent when they are sustainable and can pay their bills. To proceed with an MVL, a company should usually have assets of £25,000 or more.
There are many reasons why a director might choose this route. It might be that they are retiring, taking up a PAYE-role due to the new IR35 rules, moving abroad or simply no longer have a need for the company.
A Members’ Voluntary Liquidation is an HMRC-approved and tax-efficient process that allows directors to close down their company and extract the funds / assets from the company.
Any funds taken out of a business with an MVL are subject to Capital Gains Tax rather than Income Tax. As a result, you will pay just 10% on profits over the lifetime of your business up to a limit of £1 million.
This is a lot less than the 18% threshold for basic income tax and the 28% threshold for higher ratepayers.
There are also further advantages for those that qualify for Business Asset Disposal Relief, formerly known as Entrepreneur’s Relief prior to 6th April 2020.
Here, directors can benefit from a 10% marginal rate on distributions which can also lead to significant tax savings.
Find out more about Members’ Voluntary Liquidation and the benefits in our handy guide.
Find out how Clarke Bell can help with the next steps
At Clarke Bell, we have helped thousands of companies across the UK with the liquidation process for the past 28 years.
We offer advice that’s best suited to you and your circumstances, to help get the best possible outcome for all parties.
Whether you are considering an insolvent liquidation through a Creditors’ Voluntary Liquidation or a solvent liquidation through a Members’ Voluntary Liquidation, our team of friendly experts will work with you closely to ensure that everything is taken care of.
