There are many reasons why a company might liquidate, whether it has been decided that it is time for the director to retire or whether the business is no longer sustainable and cannot pay its debts.
If you have decided that it is time to liquidate your company it is hugely important to understand the difference between compulsory and voluntary liquidation. Although both are insolvency processes, each has significantly different implications for you as a director and for your company.
In this guide, Clarke Bell explains the differences between compulsory and voluntary liquidation and what is involved in each process, to help you decide on the best route forward.
What is liquidation?
Liquidation is the formal insolvency process where a company officially winds up its affairs and finances.
The difference between liquidation and dissolution is that liquidation involves the process of closing the company, whereas dissolution is when the company is struck off the Companies House Register.
There are two types of liquidation: compulsory and voluntary. The main difference between the two is how the insolvency proceedings come about. As the names suggest, one way is voluntary, the other is compulsory and forced upon the company.
First, let’s take a look at compulsory liquidation.
Option 1: Compulsory Liquidation
Compulsory liquidation is when a company is forced to liquidate by its creditors. This occurs when a company can no longer afford to pay its bills, settle its debts and a creditor takes legal action to receive payment for what they are owed.
To begin the process of compulsory liquidation, the creditors must first issue a winding-up petition to the court. If the creditors are successful in their petition, a company will be forced into liquidation and its assets will be sold to raise the funds to repay any outstanding debts.
When does compulsory liquidation occur?
Creditors can only issue a winding-up petition if your company owes them over £750 and only when an official payment demand has gone unfulfilled.
With compulsory liquidation, a company will be liquidated and dissolved after 2-3 months, meaning it will be removed from the company register.
That’s what compulsory liquidation involves, now let’s look at voluntary liquidation.
Option 2: Voluntary Liquidation
There are two types of voluntary liquidation: Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL). Unlike compulsory liquidation, voluntary liquidation is not forced upon a company by creditors and is instead initiated by the company director(s).
What is the difference between Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation?
A Creditors’ Voluntary Liquidation is a voluntary process but is carried out when a company is not solvent, meaning it cannot pay its bills or cover its debts. Although this is a voluntary, it is prompted by the fact that the company is no longer sustainable.
On the other hand, a Members’ Voluntary Liquidation is best for those companies that are solvent, meaning they can pay their bills, and have assets over £25,000.
This is usually the best option for company directors who no longer want or need their company, whether that’s because they wish to retire, are moving abroad or are taking up an employee role.
With a Members’ Voluntary Liquidation company directors can quickly free up funds by closing their business. Any money taken out of the company is subject to Capital Gains Tax and not income tax, making this a tax-efficient route.
What’s more, directors who qualify for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief) are subject to further tax advantages. Under this scheme, directors that sell all or part of their business pay just 10% in Capital Gains Tax on profits over the lifetime of their business, up to £1 million. This is a lot lower than the 18% for basic rate income taxpayers or 28% for higher rate tax-payers that would otherwise be charged.
When does voluntary liquidation occur?
Members’ Voluntary Liquidation might occur when a company wishes to voluntarily close in a tax-efficient manner. This is usually the case when the director(s) decide that a particular arm of their business operations should be discontinued and liquidated, despite the company being solvent and sustainable.
Creditors’ Voluntary Liquidation occurs when a business is no longer viable and can’t pay its bills. This is usually a better route than going into compulsory liquidation, as it gives company directors time to prepare for the future.
Compulsory or voluntary liquidation: which is the best route for you?
The main difference between compulsory and voluntary liquidation is whether the process has been prompted by the company director or by creditors.
In the case of compulsory liquidation, the process has been initiated by creditors who have begun the process of winding up your company. If you are considering letting your company fall into Compulsory Liquidation, there are some important factors to take into consideration:
- Professionals such as banks, accountants and solicitors can take a dim view on directors who have let their company go into compulsory liquidation
- Your credit rating might be badly impacted
- Your customers or suppliers might conceive that you have been complacent about your legal duties as a company director
If, however, you have not had Compulsory Liquidation forced upon you, voluntary liquidation will be the best route forward.
For solvent companies that are looking for a tax-efficient and HMRC-approved way to close their business, Members’ Voluntary Liquidation will be the best option.
On the other hand, for companies that are no longer making a profit and are insolvent but wish to avoid a compulsory liquidation, a creditors’ voluntary liquidation will often be the best route forward.
Let Clarke Bell help you
Whether you want to liquidate your company with a Members’ Voluntary Liquidation or a Creditors’ Voluntary Liquidation, Clarke Bell can help you.
If you’re unsure which type of liquidation is right for your situation, just give us a call and we’ll help you select the best option.
Our team of friendly experts will work closely with you to discuss your situation and find the best route for your company going forward. Contact us today for free advice on 0161 907 4044 or email us on [email protected]