Voluntary Liquidation occurs when the company directors and shareholders decide to place the business into liquidation. This is a self-imposed, voluntary process unlike a Compulsory Liquidation in which the company is forced to close.
A Voluntary Liquidation means the company must cease to trade and its operations come to an end. As a result, the company is dissolved and it is struck off the registrar of companies.
When it comes to Voluntary Liquidation, there are a couple of different routes available: a Members’ Voluntary Liquidation and a Creditors’ Voluntary Liquidation. Although both are voluntary procedures, how they work and who can apply for each differ greatly.
That’s why if you are considering Voluntary Liquidation, it’s important to know the best route forward for your company.
To help, Clarke Bell has put together this handy guide on everything you need to know about Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation. Read on to learn if an MVL or CVL is the best option for you.
What is Voluntary Liquidation?
Voluntary Liquidation is a process initiated by a company director and can only be carried out when it is approved by the company shareholders.
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This is a formal insolvency process, for that reason a licensed Insolvency Practitioner must be appointed to oversee the process of closing the company and selling any assets which can then be used to pay debts or free up funds.
Upon completion, the company is dissolved and will no longer exist.
However, there are two types of Voluntary Liquidation: Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation. So, what are the key differences between each?
Members’ Voluntary Liquidation
Members’ Voluntary Liquidation (MVL) is an option that is only available to companies that are solvent. This means those that can pay their bills, cover their daily costs and usually have assets worth over £25,000.
The reason many directors of solvent, sustainable businesses opt for an MVL is that it is considered an easy, tax-efficient way of closing a company to free up funds.
There are many reasons a director might want to take this path, whether they opened the company for a specific purpose which has now been met, they are taking up an employee role, retiring altogether or perhaps they are moving abroad.
Whatever the reason for choosing an MVL, it is a great way of closing a solvent business which can save directors a small fortune on their tax bills.
This is because with an MVL, any money taken out of the business is subject to Capital Gains Tax as opposed to Income Tax. Those that are eligible for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief before 6th April 2020) benefit from further advantages.
With Business Asset Disposal Relief, entrepreneurs that sell all or part of their company will pay just 10% in Capital Gains Tax on profits over the lifetime up of their business up to a limit of £1 million.
This will result in huge savings for directors who would otherwise pay Income Tax at a basic rate of 18% or higher rate of 28%.
As it is a completely voluntary process that is extremely tax-efficient, many directors choose to close their solvent companies in this way.
Creditors’ Voluntary Liquidation
On the other hand, a Creditors’ Voluntary Liquidation (CVL) is an option available only to insolvent companies.
There are two main tests to see if a company is insolvent:
- The cash flow test: this determines whether a company can pay its bills and day to day costs. It is deemed insolvent if it can’t fulfil these commitments.
- Balance sheet test: this determines whether your company has more assets or liabilities. If a company’s liabilities outweigh its assets then it can be deemed insolvent.
Again, a CVL is a formal insolvency process that liquidates a company, stopping it from trading and operating, and is also a completely voluntary process.
This is opposed to a Compulsory Liquidation, in which a company is forced to stop trading by creditors who issue a winding-up petition to the court if your company owes them £750 or more and their payment demand has gone unfulfilled.
A CVL is initiated by the company directors and in order to be progress requires the approval of at least 75% of shareholders.
There are many reasons a CVL might occur. This is usually the best option for companies that are no longer sustainable and are operating at a loss. It is better for them to act and enter a CVL before they are forced into liquidation.
How to apply for Voluntary Liquidation
Whether you are applying for an MVL or CVL, you should first seek expert insolvency advice to ensure you are on the right track under the circumstances.
Next, you will need to hold a meeting with shareholders to ensure you have the agreement of at least 75% in order to progress.
Next, you will need to appoint a licensed Insolvency Practitioner who will carry out and oversee the process. This is a legal requirement in the UK.
One of the benefits of undergoing a Voluntary Liquidation is that you can choose which Insolvency Practitioner to you work with, which is not the case with a Compulsory Liquidation.
To find out more about choosing the right Insolvency Practitioner to work with, check out our guide.
Let Clarke Bell help you
Whether you choose to liquidate your company with an MVL or CVL, Clarke Bell is here to help.
If you are unsure which type of liquidation is right in your case, simply give us a call and we’ll help you select the best option. Our team of experts work closely with company directors to find the best solution going forward. So, whatever your situation, complex or simple, we can help make the liquidation process quick and easy.