For many directors, the decision to close their company will be considered at one point or another. This could be for a number of reasons – directors may want to retire or take up a PAYE-role; or the company might have debts that it cannot pay. 

Whatever the reason, every director will want to close their company in the most appropriate way for their particular situation. Voluntary liquidation and a company strike-off are two of the most common methods of closing a company, but it isn’t always obvious to tell which is right option to take.

In this article, Clarke Bell will discuss these two methods of closing a company, detailing how each procedure works, the benefits of using them, and what it might mean for your company.

What is voluntary liquidation?

There are two main methods of voluntary liquidation – Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL). Although both procedures are similar and have the end result of liquidating a company, they are different. Most notably, an MVL is for solvent companies (i.e. ones with no debts); while a CVL is for insolvent companies (i.e. ones with debts that it cannot pay). 

Let’s take a look at both in further detail.

Members’ Voluntary Liquidation

An MVL is available to solvent companies, and is one of the best methods of closing such companies, mainly due to the tax savings which are available.

It can be initiated by company directors once the majority of shareholders have given consent and a Declaration of Solvency has been signed. A notice must then be posted in the Gazette, notifying the public of the intention to close the company. At this point, certain third parties, such as outstanding creditors, can obstruct this attempt at liquidation. If no objections are made within 21 days, a liquidator of the directors’ choosing can begin distributing the company’s assets to its shareholders.

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One of the core benefits of an MVL is its tax efficiency. Unlike other methods of closing a company, the MVL process entitles directors to certain tax benefits that can maximise the gains made during liquidation. Firstly, retained profits extracted during liquidation will be taxed under Capital Gains Tax (CGT) rates. This will result in notable savings, as Income Tax rates are considerably higher. In addition to this, directors may be entitled to claim Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief. This will mean a further reduction in tax rates up to a lifetime limit of £1 million. Coupling the two together can mean significant tax savings.

Creditors’ Voluntary Liquidation

A CVL is intended to help insolvent companies close efficiently, dealing with the company’s debts and the directors’ legal obligations. A main difference between a CVL and an MVL is that in a CVL a main priority is the interests of the company’s creditors, rather than its shareholders. The CVL procedure can be initiated voluntarily by directors, allowing them to appoint an insolvency practitioner of their choosing. This insolvency practitioner will be responsible for communicating with the relevant parties and the liquidation of the company. They will identify realise any assets and distribute any proceeds amongst the creditors. When any funds have been distributed, the company will be closed down and removed from the Companies House register.

The CVL procedure affords directors a series of vital benefits. Firstly, no legal action can be taken against a company once the CVL procedure is active. Essentially, this acts as a safeguard against the serving of a winding-up petition and a subsequent compulsory liquidation. Directors will be able to close their company in a way that they prefer, rather than have a procedure and liquidator forced upon their company. In addition to this, any debt that remains outstanding at the end of the procedure will be written off, provided no loans were guaranteed by a personal guarantee. 

If you would like more information regarding Creditors’ Voluntary Liquidations, read our complete guide to the process.

What is a company strike-off?

Although there are considerable benefits to closing a company using a liquidation procedure, it is not always the most effective solution. For some companies, closing using an alternative method makes more financial sense. One of the leading alternatives is a company strike-off, also known as company dissolution.

A company strike-off is only available to solvent companies. Any attempts to strike off an insolvent company will likely be caught by its creditors and stopped in its tracks. Moreover, an attempt to knowingly strike off an insolvent company will potentially be viewed as an attempt to escape company debt, which could have serious legal repercussions for any directors involved.

Assuming a company is solvent, a company strike-off can be used as a cheaper alternative to voluntary liquidation. Once a majority approves, directors can initiate the procedure voluntarily by submitting a DS01 form to Companies House. This can be done in either paper format or through an online portal, costing £10 and £8, respectively. Similar to an MVL, a notice will be posted in the local Gazette informing the public of the directors’ intentions. If no objections are made, the company can be dissolved. 

Note that it is the directors’ responsibility to transfer all assets out of the company before the end of the process; any assets that remain in the company after the procedure will be considered “bona vacantia”, or without an owner. Ownership of these assets will then be transferred to the Crown.

Which procedure should I use?

The best procedure for your company depends on your situation. If your company is insolvent to the point that recovery may not be possible, closing through a CVL may be the best option. 

For solvent companies, the right solution largely depends on the amount of your retained profits. For companies with large reserves of retained profits, it often makes the most financial sense to close using an MVL. This affords considerable tax benefits, ensuring you retain as much of your hard-earned money as possible. 

Companies with little in the way of retained profits are sometimes better served to close through a company strike-off. It is the cheapest method of closing a company, which is a key advantage for smaller companies looking to close efficiently.

Let Clarke Bell help you

If you are considering closing your company, let Clarke Bell help you. 

We have more than 28 years of experience in helping directors choose the right option for their company. We can do the same for you. 

Give us a call to discuss how we can help you.