Liquidation marks the natural end for many companies. It isn’t necessarily a negative option though. The liquidation process can be used for successful, solvent companies which are liquidated because their directors want to close them down and move on to other ventures or retire. For these situations, the process used is a Members’ Voluntary Liquidation (MVL).
The liquidation process can also be used when a company’s debts have become unmanageable, and the directors need a method to resolve the situation. A Creditors’ Voluntary Liquidation (CVL) is an option for directors to undertake to liquidate their company and deal with their debt problems. Compulsory liquidations are another type of liquidation, where a company’s creditors have petitioned the courts to help them recover the money they are owed by the company.
Each of these types of liquidation works in a similar fashion, but the role of the liquidator (who is also referred to as a Licensed Insolvency Practitioner) does vary across the three.
In this article, Clarke Bell will discuss the role of the liquidator in each of these three liquidation procedures, highlighting what they do and how the procedures can work for you.
The role of the liquidator in a Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation (MVL) is a liquidation procedure for solvent companies (i.e. ones that don’t have any debts which they can’t pay back). It is a voluntary procedure which directors can take at any time. This HMRC-approved procedure aims to extract a company’s retained profits cost-efficiently, keeping tax obligations to a minimum. Directors can then use this capital however they like, for example to fund another business venture or for their retirement.
The liquidator’s role in this procedure is to make sure the MVL is carried out lawfully and efficiently, while providing as much assistance to company directors as possible. If you intend to close your company using an MVL, your liquidator will handle the statutory legal requirements, such as helping with your Declaration of Solvency and placing the necessary statutory adverts in the Gazette. They will also work with you and your accountant regarding how to obtain Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief).
Once your company has had all its retained profits extracted, your liquidator will wind up your company, resulting in it being struck off the Companies House register.
By using an MVL, you will enjoy significant tax benefits. With a company strike-off, or dissolution, you will see your retained profits taxed under Income Tax. However, with an MVL they are subject to Capital Gains Tax (CGT) instead. This, combined with Business Asset Disposal Relief, can see you pay as little as 10% in CGT. This makes an MVL the ideal solution for companies with large reserves of retained profits (typically over £25,000). And, as mentioned above, the process is approved by HMRC.
The role of the liquidator in a Creditors’ Voluntary Liquidation
A CVL is another voluntary liquidation procedure available to company directors. Unlike an MVL, the CVL procedure is for insolvent companies (i.e. ones that cannot pay off their debts and liabilities within 12 months). In such a situation, directors can decide to voluntarily liquidate their companies to deal with the company’s debts and their legal obligations.
The role of a liquidator in the CVL procedure is similar to that of an MVL, although it has some differences. The liquidator will handle statutory requirements and realise any company assets, but they will also liaise with the company’s creditors to keep them apprised of the CVL procedure and its progress.
At the end of the CVL procedure, the liquidator will wind up the company and have it struck off the Companies House register. Any capital that is raised from the liquidation will be distributed to the company’s creditors in order of priority. As part of this process, the liquidator will satisfy claims made by employees, if there is enough capital to do so. If not, they will need to make their claims to the National Insurance Fund in order to receive their statutory payments. In many cases, directors will also be entitled to claim redundancy payments. (You can read more details about how redundancy pay works for company directors.)
In addition to the above, a liquidator will be responsible for investigating company affairs and director conduct. This is to assess whether there has been misconduct, and if there is, how that has affected the company’s fall into insolvency. The liquidator will then report their findings to the Insolvency Service, declaring whether they found any misconduct.
The role of a liquidator in a compulsory liquidation
Unlike the other two methods, a compulsory liquidation is forced upon a company, typically when its creditors have lost faith that they will receive their money and have turned to the courts for help. Creditors will do this by submitting a winding-up petition against the company, resulting in a winding-up order and the appointment of a provisional liquidator.
In this role, the provisional liquidator will take control of the company, ensuring all assets and accounts remain untouched and within the company for the duration of the procedure. At this point, you will no longer have control over your company.
During a compulsory liquidation, the provisional liquidator will be responsible for the disposal of company assets and accounts, in addition to the distribution of the proceeds amongst company creditors. As with a CVL, this distribution will follow an order of priority, ending with unsecured creditors, if there is enough money to pay them. The provisional liquidator will also be responsible for defending the use of legal proceedings against the company, if any objections are made. They will also investigate company affairs and director conduct, checking for any misconduct or fraud. The findings will be reported to the Insolvency Service, and could result in severe penalties for directors, if they are found guilty of misdemeanours.
Clarke Bell can help you
If you intend to place your company into liquidation, whether it be solvent or insolvent, let Clarke Bell help you.
We have more than 28 years of experience in helping company directors, and we can help you. Our team of experts can assist you with your liquidation, or help you find another solution if a better one exists.
Contact us today for a free, no-obligation consultation and find out what we can do for you.