What Are the Pros and Cons of Voluntary Liquidation?

June 14, 2022 / Business Insolvency

Liquidation is the fate of many companies for a wide range of reasons. Both solvent (asset rich) and insolvent (in debt) companies can be liquidated. Therefore, liquidation shouldn’t be seen as a positive or negative process, it is simply one of many ways to close a company.

The directors of a Limited Company will voluntarily place their company into liquidation for a variety of reasons. For example, if the company has simply ceased to be profitable, making the continuation of operations unreasonable or if the debt they have accrued has become too much to manage, then the only option to close the company may be a Creditors’ Voluntary Liquidation.

For directors who simply want to retire or extract the retained profits of their company in a tax efficient way, then a Members’ Voluntary Liquidation could be the best route forward.

Regardless of your situation, it is essential to know the pros and cons of voluntary liquidation before making your decision. In this article, we will discuss these pros and cons, ensuring you can make an informed decision regarding your company’s future.

What is a voluntary liquidation?

There are two main types of voluntary liquidation that companies can use, depending on their financial situation. For solvent companies, they can liquidate through a Members’ Voluntary Liquidation (MVL). Insolvent companies, however, must liquidate through a Creditors’ Voluntary Liquidation (CVL).

A voluntary liquidation can commence when directors and shareholders agree that the company cannot continue operation and must be liquidated. This can be for a range of reasons, as we’ve mentioned, but the end goal is the same. The company will stop trading, its assets will be sold and accounts emptied, and the company will cease to exist. An insolvency practitioner will be appointed to oversee the process, ensuring it is conducted in accordance with the law, and that obligations to creditors are met.

Pros of closing a company through voluntary liquidation

There are a number of benefits to using a voluntary liquidation. Here are some of the most advantageous:

Retained profits are passed to the shareholders in a tax efficient way (MVL)

If a director were to simply dissolve their company, they would need to distribute the assets of the company amongst themselves in advance. Because this is done as a normal day to day transfer to the shareholder, it is tax like any dividend would be. For those with high earnings, the tax paid on this distribution can be significant.

However, if a company is closed through an MVL, the assets of the company once liquidated, can be passed to the shareholders in a more tax efficient manner. Through an MVL, the tax paid on the distribution is not subject to income tax but capital gains tax. This can be as low as 10% for those able to claim Business Asset Disposal Relief.

Debts are written off (CVL)

Having your company be overwhelmed by debt is a stressful situation. It can have a disastrous effect on the company itself, and in some cases, transfer the responsibility for repayment to its directors. Having a way out of such a situation is invaluable.

The CVL process is one such way out. Upon entering your company into a CVL, your outstanding debts that cannot be repaid will be written off. As a director, you will not be held liable for these debts. However, if you have signed personal guarantees for any of these debts, you will be held personally liable.

Staff have options to claim redundancy pay (CVL)

When liquidating a company, the staff are made redundant by the appointed insolvency practitioner. At this point, they can claim redundancy and other benefits from your company. If the value of your company’s assets is enough to meet your obligations to creditors, your staff can be paid from the remaining money. If not, they can instead claim redundancy from the National Insurance Fund.

Leases are cancelled (CVL)

Upon placing your company into voluntary liquidation, any existing leases are cancelled as of the start date. This will save your company money, reducing the financial strain somewhat. If you already owe the leasing party money, such as in the case of arrears, you will need to cover that cost. The leasing party will typically make a claim to your insolvency practitioner, who will direct some of the extracted funds to them. If you have signed a personal guarantee as part of your leasing contract, you can be held personally liable for any arrears.

Legal proceedings against your company cease (CVL)

If your company is facing legal action, liquidation will put a stop to it. Creditors will be unable to initiate any additional legal action, including petitioning the courts for an involuntary liquidation. This is particularly beneficial, as a compulsory liquidation can cause significant problems for a company and its directors.

If you have signed any personal guarantees, you can still be held personally liable. Legal action can be taken against you directly, and you can be compelled to repay debts from personal finances if need be.

Cons of closing a company through voluntary liquidation

Voluntary liquidation, particularly a Creditors’ Voluntary Liquidation, offers considerable benefits and protections. However, it is not free from disadvantages, with some of the most impactful detailed below:

Investigations may be opened (CVL)

The greatest disadvantage to the voluntary liquidation of an insolvent company is an investigation into conduct. Upon appointment, an insolvency practitioner must open an investigation into the conduct of directors. This aims to determine why the company fell into such financial distress, and whether directors had a hand to play in it. Naturally, this investigation will be quite invasive, requiring anything relevant to your company and your actions as a director. Even if you know you have traded lawfully, it is an unpleasant experience.

If a director is found to have engaged in wrongful trading, harsh legal penalties can be applied. A director can be barred from acting for up to 15 years. Barred from other management positions, and held personally liable for the debt.

If there is wrongdoing, the directors can be held personally liable for company debt (CVL)

Following on from the last point, directors can be compelled to pay company debts. There are two ways this can happen – through investigation, and personal guarantees.

If a company director is found to have engaged in wrongful trading, they may be forced to assume liability for the debt. Similarly, if an investigation finds that a director has closed their company quickly to evade debt, they may be held personally liable. Additionally, if you have signed a personal guarantee, your creditor can enforce it in order to receive payment.

All assets will be liquidated (MVL & CVL)

Once your company enters liquidation, your appointed insolvency practitioner must sell off all assets to raise funds. This means that even assets you may want to keep during an MVL will be sold to raise funds. If you are considering liquidation and have some assets you would like to keep, you may want to consider selling them to yourself at market value prior to any liquidation.

These funds will then be distributed amongst creditors, shareholders, and used to pay any other liabilities.

Staff will be made redundant (CVL)

Similarly, as the company is to be closed, all employees must be made redundant. As we mentioned, they may be able to claim redundancy pay and other statutory benefits.

Let Clarke Bell help

If you have decided to close your company through voluntary liquidation, then allow Clarke Bell to guide you through it. We have over 28 years of experience in helping companies through the liquidation process, both voluntary and involuntary, and we can do the same for you. To find out what we can do for you and your company, don’t hesitate to contact our team of experts today.