Free Business Review
Claim your Free Business Review to understand what options are available to you.
Liquidation is a formal insolvency procedure which brings about the end of an unwanted or insolvent company. There are three main types of liquidation and the one chosen will primarily depend on the financial position of the company at the time of the liquidation. An MVL is aimed at solvent companies, while a CVL is utilised in the instance of a company being insolvent. Companies can also be liquidated compulsorily in certain instances.
Table of contents:
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.
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. Creditors' voluntary liquidation is often triggered by a downturn in company cash flow, and directors should take early advice if they're experiencing issues such as the loss of a key customer or contract, tax arrears with HMRC, or being unable to repay your bounce back loan; all typical warning signs of a company in financial distress.
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.
Don't Worry - There are thousands of other company directors going through the same process. No matter what position you are in and need looking for options, speak to a member of the Real Business Rescue team. It's Free & Confidential.
The team are available now - 0800 644 6080
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.
While placing a company into liquidation is the formal process of bringing the business to an end, this is not the only way this can be achieved. In some situations, a full liquidation procedure will not be required. Instead, the company may be able to be dissolved; this is also known as company strike off.
Company strike off – or dissolution – is an informal process which allows a company to be removed from the register held at Companies House. This is achieved by its directors submitting a DS01 form and paying the relevant fee. A notice will be placed in the Gazette advertising of the strike off application and so long as no objections are received, the company will be struck off the register. Once it is taken off the register, it ceases to exist as a legal entity. It is often a quicker, easier, and cheaper alternative to liquidation; however, you should be aware that it is not suitable for all companies and all situations.
Dissolution is aimed at those companies which have reached the end of their useful life and are no longer required by the directors/shareholders; ideally, they should hold no assets or liabilities at the point of strike off.
If strike off is attempted by an insolvent company – that is, one which has outstanding debts – it should be expected that an objection will be lodged by a creditor; if this is done, the process will be halted and the company will remain active. It is in a creditor’s interests to stop your company being struck off should debts exist, as once a company is dissolved the money owed is not easily recoverable without a lengthy and complex process to reinstate the company to the register.
On the reverse side, if your company has assets including cash at bank, these become ‘bono vacantia’ upon strike off, with ownership passing to the Crown. Therefore, if your company has debts or assets, liquidation is the most appropriate way of closing the business and tying up its outstanding affairs.
When a company experiences financial difficulties and subsequently enters liquidation, all staff are made redundant as part of the process. Depending on how long they have worked for the business, former employees may be entitled to redundancy and other statutory entitlements as compensation for losing their jobs.
What many people don’t realise, however, is that eligible directors are also entitled to claim redundancy upon the company entering liquidation. This is because, in many cases, directors are also classed as employees of the business. If you take a salary through PAYE, have worked for the business for more than 16 hours a week, and have done so for at least two years, it is highly likely you will have a valid claim for redundancy.
The amount you may be able to claim will depend on a number of factors including your length of service, age at the time of redundancy, and the salary earned. As well as redundancy, you may also be able to claim for other statutory entitlements such as notice pay, holiday pay, and arrears of wages; these additional entitlements could increase your total redundancy package by a substantial amount.
Redundancy is only possible if the company enters a formal liquidation process (such as a CVL) as opposed to being struck off. Redundancy is also only available when a company has been liquidated due to insolvency; redundancy does not apply to solvent Members’ Voluntary Liquidations (MVLs).
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, expert advice is vital in helping you make the right decision for you and your company.
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, explain the pros and cons of each, discuss your potential eligibility for redundancy, and make 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.
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.
If your company is struggling with unmanageable debts, squeezed cash flow, or an uncertain future, you are far from alone. We speak to company directors just like you every single day, and we are here to give you the help and advice you need.
Call our team today on 0800 644 6080
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 100 licensed insolvency practitioners ready to provide the help and guidance you need when it comes to your options to closing your business and your potential entitlement to director redundancy. With more than 100 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.
All UK sectors are experiencing specific challenges at present, particularly in light of the Covid-19 pandemic. Find out how your sector is performing here.
Simply search your Limited Company Name or Company Number
We will also check if you’re eligible for Director Redundancy
We provide free confidential advice with absolutely no obligation.
Our expert and non-judgemental team are ready to assist directors and stakeholders today.
Claim your Free Business Review to understand what options are available to you.
Find your nearest office - we have more than 100 across the UK. Remote Video Meetings are also available.
Free, confidential, and trusted advice for company directors across the UK.