Updated: 7 January 2025
Closing a company can feel overwhelming, especially when you’re unsure of the best way forward. Whether your company is financially stable or struggling with debts, understanding your options is crucial. Choosing the right process ensures you comply with the law and achieve the best results for everyone involved.
This guide will explain two common options for company liquidation: Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation. We’ll break down what each process involves, how they differ, and how Clarke Bell can help make the journey easier for you.
What is a Members’ Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation is a way to close a company that is still financially healthy. It allows Directors and Shareholders to wind down the business and take out its remaining profits in a tax-efficient way.
To qualify for an MVL, the company must be able to pay all its debts, including interest, within 12 months. It’s a good option for businesses that no longer need to operate and want to close in an orderly and cost-effective way.
Why might you choose an MVL?
There are many reasons Directors and Shareholders use an MVL, such as:
Retirement: You’re stepping away from the business and want to access its remaining funds.
Rule changes: For example, changes to tax rules or IR35 regulations that make running the company less practical.
The company has finished its purpose: For instance, it has completed its main project or contract.
Starting something new: You want to close your current business to focus on a new venture.
The MVL process involves the appointment of a Licensed Insolvency Practitioner (IP). The IP will guide you through the process and act as the liquidator of the company. They handle everything from checking the company’s finances to making sure all legal steps are followed.
Declaration of solvency
Before an MVL can begin, Directors must prepare and sign a Declaration of Solvency. This is a legal document that confirms the company can pay all its debts, including any interest, within 12 months. It must include a detailed statement of the company’s assets and liabilities and be signed in front of a solicitor to ensure it is legally valid. Many solicitors can now offer this service remotely, allowing the process to be completed without needing an in-person meeting.
This step is crucial because it establishes the company’s financial health. Directors must make sure the information in the Declaration of Solvency is accurate. If the company is later found to be insolvent, or if the declaration was made falsely, the consequences can be severe. Directors may face personal liability for debts, fines, or even disqualification from being a Director in the future.
Related: What Is a Declaration of Solvency in an MVL?
The Gazette notification
Once the MVL process starts, the liquidator will publish a notice in The Gazette, an official public record. This notice informs any potential creditors that the company is entering liquidation and invites them to come forward with claims.
The publication is a legal requirement, even if you believe the company has no creditors. If no claims are made within the notice period (usually 21 days), the liquidator can proceed with distributing the remaining assets to the Shareholders. This step ensures transparency and protects all parties involved in the liquidation process.
Tax benefits
One of the biggest advantages of an MVL is its tax efficiency. When you close a company with an MVL, any remaining funds distributed to Shareholders are treated as Capital Gains rather than Income. This typically results in a lower tax rate, which is particularly beneficial for higher-rate taxpayers.
Shareholders may also qualify for Business Asset Disposal Relief (BADR), which currently reduces the tax rate on distributions to just 10% for qualifying individuals. However, recent changes in the Autumn Budget 2024 will increase this rate to 14% from April 2025 and 18% from April 2026. This means acting sooner rather than later is crucial to secure the current 10% rate and maximise your financial return.
Related: Members’ Voluntary Liquidation Tax: A Guide for Directors
What is a Creditors’ Voluntary Liquidation (CVL)?
A Creditors’ Voluntary Liquidation is a formal process used to close a company that can no longer pay its debts as they become due. It is often the best option for Directors who want to handle their company’s financial difficulties in a responsible way, rather than waiting for creditors to force the issue through a compulsory liquidation.
By voluntarily entering a CVL, Directors can take control of the situation. It shows they are prioritising creditors’ interests and acting in line with their legal responsibilities. This approach can help reduce the risk of further complications, such as allegations of wrongful trading or personal liability for the company’s debts.
The role of the Licensed Insolvency Practitioner (IP)
Directors must appoint a Licensed Insolvency Practitioner (IP) to manage the CVL. The IP takes over as the liquidator and is responsible for:
Selling company assets: The liquidator will identify the company’s assets and engage an independent firm of chartered valuers to ensure they are sold for the best possible price.
Paying creditors: The proceeds from the asset sales are distributed to creditors in a specific order of priority set out by law.
Closing the company: Once all assets are sold and debts are addressed, the liquidator ensures the company is dissolved and removed from the register at Companies House.
A CVL winds up a business in a structured and legally compliant way. By working with an experienced IP, Directors can ensure the process is handled smoothly, protecting themselves and their creditors.
Related: How Long Does a Creditors’ Voluntary Liquidation Take?
Protection for Directors
Opting for a Creditors’ Voluntary Liquidation (CVL) shows that Directors are taking responsibility and acting in the best interests of their creditors. This proactive step significantly reduces the risk of accusations such as wrongful trading, where Directors continue running the business despite knowing it cannot pay its debts.
The CVL process also helps to ensure that employees are treated fairly. Through the Insolvency Service, employees may be able to claim redundancy pay, unpaid wages, and other entitlements. This is an important safeguard for Directors who want to support their staff during the company’s closure.
Consequences of trading while insolvent
Continuing to trade while the company is insolvent is a serious legal offence. It is the Director’s duty to act in the best interests of creditors as soon as insolvency is identified. If Directors allow the business to continue operating and worsen creditor losses during this time, they may face severe consequences, including:
Personal liability for debts: Directors could be required to pay creditors out of their own assets.
Disqualification: Directors may be banned from holding management positions in any UK company for up to 15 years.
Prosecution: In extreme cases, Directors could face criminal charges for fraudulent or wrongful trading, leading to fines or imprisonment.
It is critical for Directors to seek professional advice at the earliest signs of insolvency. Acting promptly and entering a CVL can help minimise these risks and ensure the closure process is handled correctly.
Key differences between MVL and CVL
These two processes are designed for different situations, depending on whether your company is solvent or insolvent. Here’s a simple breakdown to help you decide which option is right for your business.
Purpose
The purpose of a Members’ Voluntary Liquidation (MVL) is to close a solvent company in an orderly and efficient way. It allows Directors and Shareholders to wind down the business and distribute the company’s remaining assets. An MVL is often chosen when the company is no longer needed or has fulfilled its purpose, such as when Directors are retiring or starting a new venture.
In contrast, a Creditors’ Voluntary Liquidation (CVL) is used to close an insolvent company. It allows Directors to handle financial difficulties responsibly by ensuring creditors are repaid as much as possible. This process prevents creditors from forcing the company into compulsory liquidation, giving Directors more control over the closure.
Company status
For an MVL, the company must be solvent. This means it can pay all its debts, including interest, within 12 months of starting the liquidation process. Solvency is confirmed through a Declaration of Solvency, signed by the Directors before liquidation begins.
In a CVL, the company is insolvent. It cannot meet its debt obligations, or its liabilities exceed the value of its assets. Directors must act quickly to enter a CVL once they recognise the company’s insolvency.
Distribution of funds
In an MVL, any remaining funds or assets left after creditors are paid are distributed to Shareholders. This is one of the key reasons why an MVL is so appealing to business owners. It allows them to access retained profits in a structured and tax-efficient way.
In a CVL, all available funds are used to pay creditors. The liquidator sells company assets and distributes the proceeds according to a legal order of priority.
Tax implications
An MVL is highly tax-efficient for Shareholders. Distributions are subject to Capital Gains Tax rather than the higher rates of Income Tax. Shareholders who qualify for Business Asset Disposal Relief (BADR) can benefit from a reduced tax rate of 10%, maximising the financial return from closing their company.
For a CVL, there are no tax benefits for Shareholders. Since all remaining funds are directed toward creditor repayments, Shareholders do not typically receive any distributions from the liquidation process.
Why timing matters: Act early to avoid complications
The changes in the Autumn Budget 2024 mean it’s important to act quickly if you’re considering an MVL or CVL.Â
For solvent companies, increases to Capital Gains Tax (CGT) and Business Asset Disposal Relief (BADR) rates will take effect soon. Completing an MVL before the April 2025 deadline can help you avoid paying more tax and keep more of your company’s remaining funds.
Rising costs like Employers’ National Insurance and the National Minimum Wage can worsen financial problems for insolvent companies. Acting quickly allows you to address debts and close your company before things get more difficult.
Starting the process early gives you more time to plan, avoid delays, and get the best outcome for your situation.
Related: Autumn Budget 2024: Updates on MVLs and CVLs for Company Directors
Clarke Bell can help
Whether your company is solvent or insolvent, Clarke Bell’s team of experts is here to guide you through the liquidation process. We offer tailored advice and support to ensure everything is handled smoothly and professionally.
For solvent companies, we provide tax-efficient solutions through a Members’ Voluntary Liquidation. Our team ensures the process is quick, stress-free, and maximises the financial benefits for Shareholders.
For insolvent companies, we can help you manage debts and protect your position through a Creditors’ Voluntary Liquidation. We’ll guide you through resolving creditor claims, meeting your legal obligations, and closing your company in an organised way.
With over 30 years of experience, Clarke Bell has helped thousands of Directors like you. You can trust us to provide expert advice and a smooth liquidation process from start to finish.
Contact us today for a free consultation. Whether you’re planning to retire, starting a new venture, or dealing with unmanageable debts, we’re here to support you every step of the way.
