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What is liquidation? Understanding the different types of limited company liquidation

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Updated: 17th June 2020

In its simplest form liquidation is a formal process which brings about the closure of a limited company. As part of the process all company assets will be sold – or ‘liquidated’ – for the benefit of outstanding creditors and/or shareholders before the company is struck off – or dissolved – from the register held at Companies House. Once this has happened the company will cease to exist as a legal entity. Any outstanding debts owed by the company will be written off unless the director has personally guaranteed these borrowings.

Solvent vs Insolvent Liquidation

If you are considering liquidating your limited company the first thing to understand is that there is more than one way a company can be liquidated.

There are three main types of liquidation, and while all seek to achieve the same end result – that is the formal closure of the company – each process is distinct. The procedure used to place your company into liquidation depends mainly on its financial position at the time.

A company can be liquidated regardless of whether it is solvent or insolvent. For solvent companies this is done by way of a Members’ Voluntary Liquidation (MVL), while insolvent companies are liquidated through either a Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation (WUC).

1.     Creditors’ Voluntary Liquidation (CVL) – A CVL is initiated by the company’s directors when it has become clear that the company in question is insolvent and the chances of affecting a successful turnaround are slim. While this is a voluntary process, a CVL is typically only entered into when there are few other alternatives open to the company.

To begin the process of placing the company into voluntary liquidation, the directors and/or shareholders must appoint a licensed insolvency practitioner who will take control of the company and ensure its affairs are wound up in an orderly manner.

As this is a voluntary process, directors are able to appoint an insolvency practitioner of their choice and have some control over when the liquidation process commences. Directors will also be responsible for paying the insolvency practitioner’s fees for dealing with the liquidation. In many instances these fees will be taken from the company’s assets, however, if there are insufficient assets available then the directors will have to personally make up the shortfall using personal funds. Directors may be entitled to claim for redundancy should their company become insolvent which can be a valuable lifeline at a time when personal funds are likely to be tight.

Making the decision to voluntarily place your company into the hands of a liquidator can also ensure you are acting responsibly as the director of a company which has found itself in an insolvent position.

As the director of a limited company, you have a number of legal obligations you must adhere to once you are aware your company is insolvent. One of these is placing the interests of your creditors above those of the company and its shareholders. In essence this means you should not do anything to worsen the position of creditors, such as accruing additional debt or diminishing company assets. Seeking the advice of a licensed insolvency practitioner at this point to discuss the possibility of a Creditors’ Voluntary Liquidation reflects favourably on your conduct as director.

2.     Compulsory Liquidation (WUC) – In some cases a company will be liquidated by order of the court rather than voluntarily by its directors. This typically happens following the issuing of a Winding Up Petition (WUP) by one or more of the company’s creditors. Following a WUP being advertised, the company’s bank accounts will be frozen to prevent assets from being removed. The WUP will be heard by a judge, and if there is no adequate defence, a Winding Up Order will be granted which will lead to the company being forcibly wound up.

With compulsory liquidation an Official Receiver will be appointed to handle the winding up of the company and to deal with its creditors. The Official Receiver will be allocated by the courts, and their role will be to identify any company assets, realise these for the benefit of outstanding creditors, before formally winding up the company. An investigation into the conduct of the directors will then be undertaken to ascertain the reasons behind the company’s ultimate failure.

3.     Members’ Voluntary Liquidation (MVL) – A Members’ Voluntary Liquidation – or MVL – is a liquidation procedure designed as a way for solvent companies to formal close their business when a company has reached the end of its useful life. This often happens when its director(s) have no further use for the company – either due to retirement or simply because they are moving on to a new venture – and want to access the profits tied up in the business.

The main benefit of an MVL is that it allows for funds to be extracted in a tax-efficient manner. This is because funds taken from a company via an MVL are treated as capital gains rather than income, therefore they are subject to Capital Gains Tax rather than Income Tax. As an added incentive, entrepreneurs’ relief can also be applied which, if you qualify, will reduce CGT down to just 10% up to a lifetime limit of £1m.

MVLs do come with a cost attached so they are typically only suitable for those companies with in excess of £25,000 to distribute.

Liquidation Options

The need for expert liquidation advice

Whether you have made the decision to walk away from a profitable business and would like to extract the profits tied up in the company, or whether escalating debts and falling income means the business can no longer service its outgoings, company liquidation may well be the answer, however, you must remember that the liquidation of a company, whether solvent or insolvent, is a major step to take and you must take professional advice to ensure this is appropriate for you and your business. A licensed insolvency practitioner will be able to discuss your options, detailing the pros and cons of each, and making an expert recommendation about how you should proceed.

In the event of your company being insolvent, this may mean that you have to cease trading immediately in order to protect company assets and shield creditors from further losses; in some instances, however, continuing to trade may be advised if this will ultimately increase the funds available to creditors. It is only by taking the advice of a licensed insolvency practitioner that you can be sure whether continuing to trade is the right thing to do; get this wrong and you could find yourself personally liable for any resultant losses suffered by creditors.

The role of an insolvency practitioner in company liquidation

As a formal insolvency procedure, liquidation can only be entered into following the appointment of a licensed insolvency practitioner. They will take on the role of liquidator and will be responsible for a number of things during the process including liaising with creditors, identifying and recovering company assets, and distributing the proceeds of these according to a designated hierarchy. In a solvent liquidation proceeds will be distributed to shareholders, while in the case of an insolvent liquidation, any recoverable funds will be split amongst the company’s outstanding creditors.

How Real Business Rescue can help

If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner should be your next step. Real Business Rescue have a nationwide network of over 70 licensed insolvency practitioners ready to provide the help and guidance you need. With more than 70 offices located up and down the country you are never far away from expert advice.

Call Real Business Rescue today on 0800 644 6080 to speak to a member of our team and arrange a free and completely confidential consultation with a licensed insolvency practitioner in your local area.

 
Keith Tully

Partner

0800 644 6080
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