Difference between Members Voluntary Liquidation and Creditors Voluntary Liquidation

Members Voluntary Liquidation (MVL) and Creditors Voluntary Liquidation (CVL) are voluntary procedures to wind up a company with one primary difference. The MVL process is entered into and used by solvent companies, while the CVL process refers to the winding up of an insolvent company. This article will highlight the differences between the two procedures, to help you ascertain the best option for your company.

Primary differences between members and creditors voluntary liquidation

Whilst both the MVL and CVL are entered into voluntarily, there are several key differences to be aware of. The reasons for opting for the procedure tend to be different, as are the proceeds of assets realised through both processes. After a members voluntary liquidation, the proceeds go to the company shareholders. However, the funds realised through a creditors voluntary liquidation will be returned to the creditors, once the costs of liquidation have been paid.

Members voluntary liquidation

Members voluntary liquidation process

Essentially, an MVL is undertaken by solvent companies to wind up and distribute company assets, looking to release cash in the most tax-efficient method possible. This procedure will result in the end of your company, but you can extract the value of the business in cash. The final distributions of an MVL can be used as capital distribution, rather than profits. Similarly, if you are entitled to entrepreneurs relief, which we have touched on below, you can, typically, expect reductions in tax. A high rate taxpayer would, generally, expect their income to be taxed at 40-45%, but entrepreneurs relief could see that reduced to 10%.

Although members voluntary liquidation is entered into willingly by company directors, the voluntary winding up petition must be advertised in The Gazette. You can find further information on the procedure here. The MVL process is not considered an insolvency procedure, so will not affect your company in the same way as creditors voluntary liquidation, but both processes ultimately result in the closure of your business.

Entrepreneurs relief in members voluntary liquidation

As mentioned above, entrepreneurs relief allows business owners liquidating a limited company to pay a lower rate of capital gains tax on the proceeds of the closure, rather than income tax. Entrepreneurs relief could see some shareholders charged 10% capital gains tax on the distribution they receive, which is immeasurably more favourable than dividend taxation rates.

However, as a note, HMRC has recently brought out changes to entrepreneurs relief to be aware of. For example, if you choose to close your business through members voluntary liquidation, with 10% tax capital gains tax charged using entrepreneurs relief, but open a business of the same nature, trading within two years – HMRC may believe you closed the previous business for tax advantages, and will reclassify this as income leaving you liable for income tax and national insurance contributions. You can read more about the HMRC entrepreneurs relief changes here.

Creditors voluntary liquidation process

Creditors voluntary liquidation is initiated by the directors and shareholders of the business, where they are looking to liquidate a company which is unable to pay its debts. Unlike an MVL, the CVL refers to an insolvent company, but both processes must be carried out by a licensed insolvency practitioner (IP). By entering creditors voluntary liquidation, you limit personal liability and avoid the threat of compulsory liquidation.

A CVL is designed to protect the creditors, and the licensed IP will work to realise company assets and recoup debts for the creditors. The threat of creditor pressure could be a primary reason for voluntarily entering into this process. You can find more information on the timeline here, and look into the order of payment for creditors here.

Redundancy relating to CVL

Employees will be made redundant due to the liquidation of the company. If the company is unable to meet the costs of employees’ redundancy entitlements, they may also be able claim to the Redundancy Payments Office for redundancy pay, notice pay, unpaid wages, and outstanding holiday pay. This also applies to directors who have contracts of employment with the company, and if you are struggling to pay the costs of liquidation may be used as an option to cover these.

Is there a time when an MVL can become a CVL?

As mentioned at the beginning of the article, the MVL is undertaken by a solvent company and is, subsequently, advertised in The Gazette. If the company has outstanding debts that have not been settled, this public notice of liquidation could lead to creditors coming forward and submitting claims against your business, possibly pushing your firm to insolvency. If the company becomes insolvent or the liquidator discovers it is insolvent, the liquidation will then be converted into a CVL.

If this happens there is the chance that criminal charges may be brought against the director of the company. It is therefore important that full disclosure is given as if it emerges that a company is insolvent after giving a declaration of solvency, you will likely face serious repercussions.

Seek advice

If you are looking to close your business, but unsure which of the two processes is most suited to you, don’t hesitate to get in touch. Our business rescue experts are licensed insolvency practitioners and can offer guidance on which process will work best for your corporation.

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