There are different types of liquidation, including solvent liquidation / Members’ Voluntary Liquidation (MVL) and insolvent liquidations which includes compulsory liquidation and Creditors’ Voluntary Liquidation (CVL).
Although these all end with a company being liquidated and dissolved, they are very different processes. To determine which option is right for your company, you will need to look at your finances and circumstances.
Clarke Bell offers this handy guide explaining everything you need to know about liquidation and how to liquidate a company.
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Solvent liquidation
A company that is solvent can pay its liabilities when they are due and has assets that outweigh their liabilities.
Only these solvent companies can liquidate their business through the Members’ Voluntary Liquidation process.
An MVL is a formal process that must be undertaken by a licensed Insolvency Practitioner. This is typically used by a company which has assets of over £25,000.
This is a completely voluntary process that is initiated by company directors at a time that is right for them.
If you have decided that this is the best option for your company, the next steps should be to engage the services of an Insolvency Practitioner who will advise on whether this is the best route forward.
If this is agreed, you will next need to declare that the company:
- Is solvent, meaning it can pay its bills and cover its daily costs
- Can pay all its creditors
- Able to pay all its taxes
- Can meet any contractual obligations
You will then need to provide the following to the liquidator before the liquidation proceedings can commence:
- final accounts, made up to the date the company ceased to trade
- all creditors must be paid
- any physical assets to be disposed of
- any outstanding charges to be satisfied
- the final VAT return and Corporation Tax Return to be submitted (upon the company being placed into Liquidation, a further short period return will be required to be submitted)
- if any liability is owed to HMRC after the submission of these forms, this will need to be paid.
What are the benefits of Members’ Voluntary Liquidation?
One of the main benefits of closing a solvent company through Members’ Voluntary Liquidation is that it is an HMRC approved, tax-efficient way of dissolving a company.
This is because when closing a company through a Members’ Voluntary Liquidation, any funds taken out are subject to Capital Gains Tax rather than Income Tax, which is set at just 10%.
This is significantly less than the level of income tax you would otherwise be charged which sits at 18% for the basic level and 28% for the higher level.
What’s more, there are further advantages for company owners who qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief before 6th April 2020).
This means you can sell all or part of the company and pay just 10% in Capital Gains Tax on profits over the lifetime of your business, up to a limit of £1 million, which can save directors a significant sum on their tax bill.
This makes an MVL a quick, tax-efficient way of closing a business and freeing up funds.
Insolvent liquidation
Creditors’ Voluntary Liquidation (CVL)
As we have mentioned, there are two types of insolvent liquidation, one being Creditors’ Voluntary Liquidation.
Creditors’ Voluntary Liquidation is a form of liquidation open to insolvent companies, allowing them to voluntarily liquidate. As it is a formal insolvency process, a Licensed Insolvency Practitioner must be appointed to carry out and oversee the process.
Unlike a solvent company, an insolvent company is one that 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 are looking to avoid being forced into compulsory liquidation if they fail to pay back their debts.
By entering into CVL, the director is showing that they are taking steps towards meeting their company’s debt obligations and paying back creditors what they are owed. A CVL can also help to protect your reputation as a director and will also leave more options open to you in the future.
Compulsory liquidation
The final form of insolvent liquidation is compulsory liquidation.
Unlike the other two types of liquidation which are voluntary, compulsory liquidation is a process initiated by a company’s creditors who are owed £750 or more and have had repayment demands gone unfulfilled for 21 days or more.
These creditors can issue a winding-up petition to the court which, if successful, can forcibly liquidate the company. Here, the director will have very little control over the process and 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.
Closing your company? Let Clarke Bell help
If you are considering liquidating your company, whether through a CVL or MVL, or if you have been issued with a winding-up petition, it is always best to seek professional advice.
Clarke Bell can provide expert advice on whether liquidating your company will be the best route forward and what options are open to you.
We have been trading for more than 28 years and have helped thousands of company owners with the liquidation process through our expert insolvency advice. If you’d like to join the thousands of companies we have already put through the liquidation process, why not get in touch today?
