Difference Between a Creditors’ & Members’ Voluntary Liquidation

May 6, 2022 / Business Insolvency

When closing a company, its financial position will affect the route to closure chosen by its director(s). There are many reasons why directors would choose to close their company and many scenarios which can play out during the liquidation process.

A key thing to be aware of is that a Licensed Insolvency Practitioner must be appointed to liquidate a company…they will be the liquidator.

In this article, we will be discussing two of the most common methods of closing a limited company – a Members’ Voluntary Liquidation (MVL) and a Creditors’ Voluntary Liquidation (CVL).

We will discuss each type of liquidation, when each can be used and the main differences between the two.

What is a Members’ Voluntary Liquidation?

An MVL is a very tax-efficient method of closing a solvent company. It can be undertaken for a wide range of reasons, including a role change (maybe because of IR35) and retirement.

To put your company into liquidation you will first need to appoint a Licensed Insolvency Practitioner. It is their job to help ensure that your company closes within the confines of the law and the insolvency regulations.

One of the first roles a director must undertake after appointing an Insolvency Practitioner is to sign a Declaration of Solvency, stating that, to the best of their knowledge, the company is free from any debt issues. The Declaration of Solvency must be sworn in the presence of a solicitor. In practice, swearing this means that you are declaring that your company can pay back its debts and other liabilities within 12 months. Falsely making a Declaration of Solvency can result in serious consequences for you and your company.

The Gazette

As part of the MVL process, Statutory Adverts are placed in a publication called the Gazette. The aim of these adverts is to provide any possible creditors the chance to come forward to lodge their claim against the company. If your company is solvent, there won’t be any creditors coming forward, but the adverts do still need to be placed.

{If you have made a false Declaration of Solvency, you can expect your proposed MVL to be contested by your outstanding creditors. If your company is shown to be insolvent, you’re your creditors may well force it into a compulsory liquidation. This can have personal consequences to you. Such as carrying fines, disqualification from management positions and potentially even a prison sentence.}

At the end of the MVL process, your company will be closed, with the retained profits going to the company’s shareholders. Distributed funds are subject to Capital Gains Tax, rather than higher Income Tax, making it a tax efficient process. And, if you qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs’ Relief), you can even benefit from a lower 10% marginal rate on distributions.

What is a Creditors’ Voluntary Liquidation?

A CVL is used to close an insolvent company (i.e. one with bills it cannot pay), usually as a means of dealing with their outstanding debts and avoiding a compulsory liquidation. By voluntarily entering into a CVL, directors are afforded a degree of protection from future claims against the company. Compulsory liquidations, on the other hand, can lead to nasty consequences for company directors. So, you should avoid letting your company go into compulsory liquidation, if possible.

As with an MVL, a Creditors’ Voluntary Liquidation can only be undertaken by an Insolvency Practitioner.

A CVL is initiated by directors voluntarily, albeit under some financial duress. The purpose of a CVL is to close down a company and extract as much value as possible, though any extracted value is used to pay back creditors and cover other liabilities.

As with an MVL, there are legal boundaries to consider, and falling foul of them can lead to serious consequences. You will be guided throughout the process by the licensed insolvency practitioner. They will act as the liquidator, dealing with selling any assets and winding down the company. The liquidator will also provide a report on the conduct of company directors. This report is usually just a formality. Although if company directors are found to have been trading unlawfully, it can spark an investigation and harsh penalties. These penalties include disqualification from management for up to 15 years, fines and personal liability for debts, and, in the worst case, a prison sentence.

Also Read: How Long Does a Creditors’ Voluntary liquidation Take?

What are the main differences between an MVL and a CVL?

There are some key differences between a Members’ Voluntary Liquidation and a Creditors’ Voluntary Liquidation. These include:

  • Purpose – The most obvious difference between the two types of liquidation is the reason to start the process. Directors will choose an MVL if they have assets. Typically cash-at-bank and worth over £25,000 – which they wish to extract from the company in a tax-efficient way. With a CVL, however, the reason for starting the process is because the company cannot pay its debts. The director wants to deal with the company’s debts and does not want to risk the company being forced into compulsory liquidation.
  • Solvency status – To do an MVL a company must be solvent; whereas those going through the CVL process will be insolvent.
  • Extracted profits – An MVL sees the extracted profits distributed to the company shareholders. With a CVL, however, there are no profits. If there are any company assets in a CVL, these will go towards paying back the outstanding creditors.

Clarke Bell can help you

If you are considering closing your company, Clarke Bell can help you – whether your company is solvent or insolvent.

We have been helping company directors with the liquidation process (MVL and CVL) for over 28 years. So, you are in safe hands.

To find out how we can help you, contact our experts today.