Voluntary liquidation takes place when the directors and shareholders of a company decide to place it into liquidation, contrary to a Compulsory Liquidation where the company is forced to close. This process brings the company’s trading and operations to an end.
As a formal insolvency process, voluntary liquidation is required to be carried out by a licensed Insolvency Practitioner and carries legal obligations and time restrictions for both parties. Therefore, it’s not a decision to be taken lightly.
It can be a difficult and stressful time for directors that have opted for voluntary liquidation. So, to help make the process a less daunting one, Clarke Bell has outlined everything you need to know about Voluntary Liquidation, from what is involved to the different routes available.
Voluntary Liquidation Explained
The voluntary liquidation process must be initiated by the company’s directors and is only carried out when it is approved by the company’s shareholders.
The choice to liquidate puts a company in the hands of an insolvency practitioner who will carry out and oversee the process of closing down the company and selling any assets which can then be used to pay debts or free up funds.
Once the process has been completed, the company is dissolved, meaning it is struck-off the registrar of companies.
Voluntary liquidation can be chosen to close an insolvent company which can no longer pay its bills and is no longer feasible, which is otherwise known as a Creditors’ Voluntary Liquidation. However, it can also be chosen to close a solvent company in a tax-efficient manner, otherwise known as a Members’ Voluntary Liquidation.
Before you know which type of voluntary liquidation is best for you, you must first establish whether your company is solvent or insolvent.
How is a company classed as insolvent?
There are two main ways to establish whether your company is insolvent:
- The cash flow test: this establishes whether a company can pay its bills and debts. A company is deemed cash-flow insolvent if it can’t pay its day-to-day costs.
- Balance sheet test: this determines whether your company has more assets or liabilities. If your liabilities outweigh your assets then you are considered insolvent.
Once you have determined whether your company is solvent or insolvent, you can take the best next steps forward for you.
Creditors’ Voluntary Liquidation: the best choice for insolvent companies
Creditors’ Voluntary Liquidation (CVL) is for those companies that can’t pay their bills or debts and are being chased for payments. This is a formal insolvency procedure that involves the company director(s) voluntary closing their business and ceasing to trade.
CVL is usually the best route for insolvent companies that have creditor’s asking for money to be repaid that want to avoid being forced into Compulsory Liquidation, those that wish to protect their personal finances and for companies that don’t show signs of recovering.
For a CVL to be carried out, at least 75% of the company’s shareholders must agree to initiate the process.
What are the advantages of a Creditors’ Voluntary Liquidation?
One of the main advantages of choosing a Creditors’ Voluntary Liquidation is that it demonstrates that you have taken proactive steps towards meeting your debt obligations and have opted to take control of a difficult situation rather than ignoring your problems.
By initiating the process yourself, it also means you can choose which Insolvency Practitioner you want to appoint to carry out the process.
By going through a CVL, you fully acknowledge your legal duties to your creditors and therefore avoid any risk of wrongful trading.
It will also mean that your personal credit rating or financial situation is not impacted. For more help with how to minimise personal risk during a Creditors’ Voluntary Liquidation check out our handy guide here.
If, however, you are a solvent company, you will instead want to go through Member’s Voluntary Liquidation.
Members’ Voluntary Liquidation: the best choice for solvent companies
Members’ Voluntary Liquidation (MVL) is the best route forward for companies that are solvent, meaning they can pay their bills and have assets over £25,000.
So, why would a company director choose to close their company through a Members’ Voluntary Liquidation?
MVL is the best option for the director(s) that no longer want or need their company and want to close it in a tax-efficient manner. This can be for a number of reasons, whether you are taking a step back, retiring altogether or moving abroad.
A Members’ Voluntary Liquidation allows the company director(s) to close their company quickly and free up funds.
Here, any money taken out of the business is subject to Capital Gains Tax rather than income tax. This means you will pay just 10% on profits over the lifetime of your business (up to a lifetime limit of £1 million), significantly less than the 18% threshold for basic income tax and the 28% threshold for higher ratepayers.
What’s more, there are further tax advantages if you are eligible for Entrepreneurs’ Relief. Here, you can benefit from a 10% marginal rate on distributions which can lead to considerable tax savings.
What are the advantages of a Members’ Voluntary Liquidation?
Clearly, the main benefit of an MVL is that it is a tax-efficient way of closing a business as the funds distributed are subject to Capital Gains Tax. This is a completely voluntary way of liquidating a company and will quickly free up money from the company.
Whichever route you take, let Clarke Bell help
Whether you are looking to liquidate your company with a CVL or a MVL, Clarke Bell are here to lend a helping hand.
With over 25 years’ experience, we have helped thousands of companies carry out the liquidation process, taking on cases across the UK. We work closely with company directors to discuss their situation and offer expert advice on the best route forward.