Voluntary liquidation occurs when a company director chooses to wind-up and dissolve their company. Unlike in the case of compulsory liquidation, this is a completely voluntary process initiated by a company director that must be approved by its shareholders.
The outcome of voluntary liquidation is that the company ceases to trade, its finances are wrapped up and it is dissolved whilst, where possible, paying back creditors what they are owed.
There are two main types of voluntary liquidation, Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL.)
In this guide, Clarke Bell explains the differences between a CVL and MVL, to help you understand what your options are when it comes to voluntary liquidation.
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What is voluntary liquidation?
As we have mentioned, voluntary liquidation is the process of voluntarily liquidating a company’s assets in order to pay off debts or free up funds. This is initiated by the company director and has to be approved by 75% of shareholders.
Once voluntary liquidation has been completed, the company is dissolved, meaning it is closed and struck off the registrar of companies.
When is voluntary liquidation right for me?
There are a few reasons why a director may choose to place their company into voluntary liquidation.
This is a route that can be taken with an insolvent company – i.e. one that can no longer pay its debts, cover its costs as they come in or has liabilities that outweigh its assets. In this case, the company will undergo a Creditors’ Voluntary Liquidation.
Here, the insolvent company will liquidate and dissolve whilst ensuring that all creditors are, where possible, paid back what they are owed.
However, voluntary liquidation can also be a route taken by a solvent company – i.e. one which is viable and profitable, but no longer wanted. In this case a company would enter into Members’ Voluntary Liquidation. This can be a great way of closing a company in a tax-efficient manner.
Now, let’s look at a CVL vs MVL and the differences between the two.
Creditors’ Voluntary Liquidation
Creditors’ Voluntary Liquidation is an option that allows insolvent companies to voluntarily liquidate.
A CVL is usually the best route to take for companies that owe money to creditors and wish to avoid being forced into compulsory liquidation if they fail to pay back their debts.
As a formal process, a licensed Insolvency Practitioner must be appointed to carry out and oversee the Creditors’ Voluntary Liquidation.
One of the main benefits of Creditors’ Voluntary Liquidation is that it shows that the company director has taken proactive steps towards meeting their debt obligations and paying back creditors. This means you can safeguard your reputation as a director, leaving more options open to you in the future.
By undergoing a CVL, you are also showing that you acknowledge your legal duties to your creditors and therefore avoid any risk of wrongful trading. You will also protect your personal finances from the business debt with this route.
Following a CVL, the director can choose to open a new company in the future if they wish.
What’s more, by entering into Creditors’ Voluntary Liquidation you can avoid being forced into liquidation, from which fewer options will be open to you.
Members’ Voluntary Liquidation
Unlike Creditors’ Voluntary Liquidation, Members’ Voluntary Liquidation is an option open only to solvent companies.
A company is solvent when they are sustainable and can pay their bills. To proceed with an MVL companies should usually have assets of £25,000 or more.
There are several reasons that a director might choose Members’ Voluntary Liquidation, whether that is because they are taking up a PAYE-role, retiring, moving abroad or simply no longer has a need for the company.
Members’ Voluntary Liquidation is a popular option as it allows directors to easily close their company and free up funds. It is also an HMRC approved tax-efficient way of closing a business.
This is because with an MVL, any funds taken out of the business are 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 limit of £1 million. This is significantly less than the 18% threshold for basic income tax and the 28% threshold for higher ratepayers.
There are also further advantages for those that qualify for Business Asset Disposal Relief (formerly known as Entrepreneur’s Relief before 6 April 2020.) Here, directors can benefit from a 10% marginal rate on distributions which can also lead to big tax savings.
For more information on Business Asset Disposal Relief check out our complete guide.
Voluntary Liquidation vs Compulsory Liquidation
Unlike Creditors’ Voluntary Liquidation and Members’ Voluntary Liquidation which are both forms of voluntary liquidation, compulsory liquidation is when a company is forced to liquidate.
Rather than being initiated by the company director, this is a process that is begun by creditors who are owed money of £750 or more and have had repayment demands gone unfulfilled for more than 21 days.
These creditors can issue a winding-up petition to the court. If successful, the court will forcibly liquidate the company, appointing an Insolvency Practitioner to do so. The directors will have no choice of who is the liquidator of their company.
As it sounds, this is the most serious form of liquidation and it can have many negative impacts for the director.
To find out more about compulsory liquidation, winding-up petitions and what to do if you are served with one, check out our handy guide.
Let Clarke Bell help with the next steps
Whether you are looking to liquidate your company through Creditors’ Voluntary Liquidation or Members’ Voluntary Liquidation, Clarke Bell are here to help.
Our team of experts have over 28 years’ experience and have helped thousands of companies undergo the voluntary liquidation process. Whatever your situation, we will work with you closely to understand your situation and get the best possible outcome for you. Our team of friendly professionals will offer expert insolvency advice to get you on the right track in 2021.