Liquidation is usually the legal closing down of a business which may be solvent or insolvent.
The company’s directors or shareholders can place the company directly into liquidation by either a Creditor’s Voluntary Liquidation (CVL) or a Members’ Voluntary Liquidation (MVL) or a Court can make a winding-up order for a compulsory liquidation on the petition of a creditor or the company itself.
CREDITORS’ VOLUNTARY LIQUIDATION (CVL)
This occurs where the shareholders, usually at the directors’ request, decide to put a company into liquidation because it is insolvent. Either the company cannot pay its debts as they fall due or it has more liabilities than assets.
The purpose of the liquidation is to appoint a responsible person who has a duty to collect the company’s assets and distribute them to its creditors in accordance with the law. That person is the liquidator who must be a licensed insolvency practitioner.
BENFITS OF A CVL
- You will be able to utilise your time to gather all the necessary information together and plan the best route for your Company. If you were being faced with compulsory liquidation you will be subject to time frames forced upon you. A CVL can be a relatively quick process and a decision process can usually be convened within a few weeks. It can take months for a compulsory liquidation and this can be a worrying time while you are still at the mercy of your creditors.
- With a voluntary liquidation you will decide who you wish to use as your nominated liquidator. This does not happen when faced with compulsory winding up where an Official Receiver is appointed.
With a voluntary liquidation there is the potential to purchase the assets of the business. Directors who have an appetite to carry on the business inside a new company would sometimes wish to acquire these.
MEMBERS’ VOLUNTARY LIQUIDATION (MVL)
A solvent liquidation is known as a Members’ Voluntary Liquidation in which a liquidator is appointed by the shareholders and the company’s assets are sufficient to settle all its debts with twelve months.
MVLs are generally used, in the case of owner managed businesses, to enable the shareholders to realise their interest in the company.
One of the main tax advantages of a Members Voluntary Liquidation is that taxation is applied as if distributions were of capital rather than an income. Therefore, capital distributions can be subject to a lesser tax than if the funds were extracted as dividends outside of an MVL procedure.
Since the introduction of the Extra- Statutory Concessions Order 2012 any distribution to Shareholders when closing down a solvent business that has over £25,000 to make in shareholder distributions, is treated as income for tax purposes unless a Members Voluntary Arrangement is used.
In most cases, the Shareholders of trading companies meet the criteria for entrepreneur’s relief which means that capital gains are only charged at 10% instead of 18% provided the gains are less than £10 million.
LMS liaise with your tax advisor to make ensure you see the benefit of all reliefs available to you
If you wish to discuss the MVL process in more detail then please contact us.
A compulsory liquidation is usually where a creditor has petitioned the Court for the winding up of the company. The official receiver becomes the liquidator but normally appoints an insolvency practitioner to carry out the liquidation. This is also known as a ‘compulsory winding up’.