What is Company Liquidation?

May 31, 2022 / Business Insolvency

Many company directors choose to close their companies for one reason or another. This could be due to lack of profitability, retirement, or other reasons. However, despite being a common occurrence for companies, it can be difficult for directors to find the most appropriate way to close.

Liquidation can be the most suitable method of closing for many companies, and can be broken down into three main types. Each type of liquidation has its specialties, with a company’s financial state being the deciding factor for which type is picked. A Members’ Voluntary Liquidation (MVL), for instance, is a process intended for solvent companies. A Creditors’ Voluntary Liquidation (CVL), however, is for insolvent companies. It is vital to know the different types of liquidation to make the right choice for your company.

What is company liquidation?

Liquidation is a formal procedure initiated by company directors, or in some cases, a third party, to close a company. During a liquidation, all company assets will be realised and company accounts emptied. The capital extracted will then be distributed amongst company creditors and shareholders, with the company being struck-off afterwards. This means that the company will cease to exist, and be removed from the Companies House register. At this point, if the company still has outstanding debts unsecured by a personal guarantee, the debts will be written off.

Types of company liquidation

There are three main types of company liquidation, each for the particular financial positions of a company. As such, you should understand each type of liquidation and your own company’s situation before you leap into any liquidation procedure.

Before we discuss the types of liquidation, let’s first explain the financial situations they are aimed at. Companies intended for liquidation will either be solvent or insolvent, which will determine the options available. Solvency refers to companies that can pay their debts and other liabilities within 12 months. Insolvency refers to companies that can’t. The types of liquidation available to you depend on which of the two apply to your company.

Also Read: Does a Company In Liquidation Still Exist?

Members’ Voluntary Liquidation

The most effective way to close a solvent company is an MVL. It allows directors to voluntarily wind-down operations, often due to starting a new enterprise and having little use for the company. In such cases, an MVL will enable directors to access the retained profits within the company at a low cost.

An MVL is widely used to close solvent companies because of its tax efficiency. Profits extracted from a company are taxed as Capital Gains, rather than income. Additionally, an MVL allows directors to apply for business asset disposal relief, previously known as entrepreneurs’ relief, which can further reduce the tax rate. Upon a successful application, directors could be entitled to a 10% Capital Gains Tax, with a limit of £1 million. This would more than cover the cost of the MVL process, while granting directors a lump sum to carry into their future ventures.

Creditors’ Voluntary Liquidation

If, however, a company is insolvent, it cannot be closed using an MVL. Instead, an insolvent company must close using another method, such as a CVL. Though it is a voluntary process, it tends to be used as a last resort, when scarce few options are left. A CVL is initiated by company directors, usually when there is little chance of restoring the company to a state of solvency. If a CVL is being considered, it is best to seek advice and take action swiftly, before debts spiral out of control.

If directors intend to close their company through a CVL, they must first inform company shareholders and appoint a professional insolvency practitioner. This insolvency practitioner will then take the helm. Carrying out the process on behalf of the company directors, ensuring the company closes correctly and in accordance with the law.

During a CVL, assets will be realised, with the extracted funds going to repay the company’s creditors and other liabilities. If there is any money left after these liabilities are paid, it will be distributed amongst company shareholders. At this stage, directors will be responsible for paying the insolvency practitioner’s fees. If there isn’t any money left within the company, the fees must be paid from the directors’ own pockets. In this case, applying for redundancy is an excellent option to take some pressure off of personal finances.

Compulsory liquidation

The third and final method of liquidating a company is through compulsory liquidation. This, unlike its previous two counterparts, is an involuntary process. A compulsory liquidation will be imposed upon a company by the courts. Usually at the request of one or more of a company’s creditors. This request is made via a Winding Up Petition (WUP), and will go before a judge to decide whether the compulsory liquidation should be imposed. The company’s accounts are frozen during this time, ensuring no assets or funds can be extracted.

If the courts accept the WUP, the compulsory liquidation can begin. An Official Receiver will be appointed, tasked with closing the company and ensuring the funds extracted from it go to outstanding creditors. Once all assets are realised, the company will be wound up.

At the end of the compulsory liquidation process, an investigation into the conduct of directors will be opened. The purpose is to look for wrongdoing, such as improper use of company funds. If any wrongdoing is found, directors can face serious consequences. Disqualification from any management position is common, and even being made personally liable for company debts is a possibility.

Company strike-off – an alternative to company liquidation

Although some method of liquidation is often the most appropriate for a company, it is not always the ideal solution. In such cases, a company strike-off, also known as dissolution, might be the better option.

Striking-off a company allows directors to voluntarily close their company without undergoing the liquidation process. This method is ideal for directors that wish to close their company, but do not have enough retained profits to take advantage of the tax benefits of an MVL. As a company strike-off is incredibly cost-effective, costing only £10 when using a paper DS01 form, it is ideal for smaller companies with few assets.

Though a company strike-off can be made to close a company with assets, it is best to extract them beforehand. This is because any assets remaining will become “bona vacantia” once the company ceases to exist, meaning that they will be transferred to the Crown.

A company strike-off is an option only available to solvent companies. A creditor will likely block attempts made by insolvent companies, once the notice of the strike-off has been posted in the Gazette. If a creditor objects, the process will be stopped in its tracks. Creditors of insolvent companies are likely to keep an eye out for a strike-off notice. If an insolvent company closes without any objections being made by creditors, the debt can only be recovered through lengthy legal proceedings. This usually means that debts are written off, as they often aren’t worth the effort required to retrieve payment. As such, it is incredibly unlikely for an insolvent company to sneak a strike-off by outstanding creditors.

Clarke Bell can help you

If you intend to liquidate your company, reaching out to a licensed insolvency practitioner is in your best interests. In this capacity, Clarke Bell can help. We have over 28 years of experience helping companies close, both through liquidations and otherwise. Our team of experts can guide you through the process too. Contact Clarke Bell today for a no-obligation consultation, and find out what we can do for you.