You may have heard the term company liquidation thrown around and wondered what it really means?
We know because we’re BusinessRescueExperts – it’s literally our job.
But for busy directors and business owners who are spending most of their time running their own firms – they can be a little hazy about what the differences between compulsory and voluntary liquidation is.
Also how does an MVL differ from a CVL? Is administration liquidation? Can you go from one to the other and why?
Today we’re going to answer some of these questions!
What is company liquidation?
There is no specific legal procedure called company liquidation.
Rather it’s a blanket term used to describe the legal process in which a licensed insolvency practitioner is appointed to “wind up” the affairs of a limited company.
It can be a result of many different factors or causes but one of the most key differences is whether the process is voluntary or compulsory.
So what are the different types of liquidation?
The different legal types of liquidation that a company can undergo are:-
A compulsory liquidation is when a business is forced into liquidation by a court. Usually by way of a winding up petition which can be brought for unpaid debts for as little as £750 if the court believes the company cannot or will not repay them.
A creditors voluntary liquidation is a voluntary process used when a company cannot reasonably pay off its debts in a timely manner and the shareholders or directors decide to put the business into liquidation and close.
A members voluntary liquidation is another voluntary process when a director or company has enough money to pay off its debts within a 12 month period but have decided to close the company at a time of their choosing.
What are the differences between a CVL and an MVL?
There are four main factors to differentiate between a creditors voluntary liquidation and a members voluntary liquidation. They break down as follows:
Financial position of the company
- MVL: Used when a company is solvent. The company’s shareholders decide to close down the company voluntarily for various reasons, such as retirement or restructuring, and there is no reasonable threat of insolvency.
- CVL: Used when a company is insolvent. The directors and shareholders decide to wind up the company voluntarily because it can no longer continue trading profitably and there is a need to distribute the available assets fairly among the creditors.
- MVL: All debts can be settled and creditors are usually paid back in full within a 12 month period.
- CVL: The available funds are distributed among the creditors in order of priority when distributed by the insolvency practitioner handling the liquidation.
Purpose and Objectives
- MVL: The primary objective of an MVL is to achieve an orderly and efficient closure of a solvent company. The company’s assets are liquidated, debts are paid, and any surplus funds distributed among the shareholders.
- CVL: The main purpose is to ensure an orderly liquidation of the company’s assets and a fair distribution of the proceeds among the creditors. The focus is on satisfying the outstanding debts as much as possible.
Declaration of Solvency
- MVL: In order for the liquidation to go forward, the directors must sign a declaration of solvency stating that they can pay off all of its debts within a 12 month period.
- CVL: As the company is insolvent, there is no need for a declaration of solvency.
An MVL can also provide tax advantages for directors and shareholders by allowing them to treat any final distributions as capital distribution rather than profits.
Higher rate taxpayers would usually be taxed on profits at the usual rate of 40-45% but with an MVL, if they are entitled to Business Asset Disposal Relief (BADR), previously known as entrepreneurs relief, they would instead be taxed at a lower rate.
We hope we’ve helped clear up any confusion about the different types of liquidation but if you’re still a little unsure then we’d be more than happy to chat it through with you.
Once you get in touch to arrange a convenient time and date then you’ll be in a better position to choose your next move and probably with a better range of options than you originally thought you’d have.