What is Voluntary Liquidation?

March 11, 2021 / Voluntary Liquidation

As the name suggests, voluntary liquidation takes place when a director chooses to close their company and place it into liquidation.

Unlike compulsory liquidation, this is a completely voluntary process that is initiated by the director.

Voluntary liquidation is a means of closing a company which still has assets and liabilities to be dealt with. This is a process that breaks downs the company’s assets and liabilities, redistributing them to the shareholders and creditors of the company.

There are two main types of voluntary liquidation, Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL.)

To help you find the best option for you under the circumstances, Clarke Bell has put together this comprehensive guide on everything you need to know about voluntary liquidation, so you can get on the right track.

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What is voluntary liquidation?

As we’ve mentioned, voluntary liquidation is entered into voluntarily by a company director and can only be carried out with the approval of at least 75% of company shareholders.

This is contrary to compulsory liquidation in which the company is forced to close. This is a process initiated by creditors who are owed money. Creditors can issue a winding-up petition to the court which, if successful, gives the court the right to appoint a licensed Insolvency Practitioner to close the company and pay back creditors.

Voluntary liquidation is an official insolvency process that winds up and dissolves a company, liquidating its assets which are in turn used to free up funds or pay off debts that are owed.

Following the voluntary liquidation process, the company is dissolved, meaning it will stop trading and is struck off the registrar of companies.

There are many reasons a company director would choose to enter into voluntary liquidation and this is a route that can be taken by either insolvent companies who can no longer afford to pay their debts or cover their daily costs, or solvent companies that are still viable.

A director of an insolvent company might choose this route as a way of taking control and closing their company in a way that ensures creditors are paid back what they are owed.

On the other hand, the director of a solvent company might select this option as a tax-efficient way of closing their business and freeing up funds.

Whatever your situation, next we will look at the different type of voluntary liquidation, so you can find the best route for you.

Members’ Voluntary Liquidation (MVL)

One type of voluntary liquidation is Members’ Voluntary Liquidation.

This is an option available only to solvent companies. This means a company that is sustainable, can pay their bills and generally hold assets of £25,000 or over.

There are many reasons a director might choose to place their company into Members’ Voluntary Liquidation, including:

  • They are retiring
  • They are moving abroad
  • They are taking a step back in the company to a PAYE role
  • They no longer have a use for the business

An MVL is a great way to quickly free up funds and is also a highly tax-efficient way of closing a business.

This is because any funds taken out of a business through an MVL are subject to Capital Gains Tax which is set at 10% rather than Income Tax which is set at 18% or 28% at the higher level.

Further to this, there are additional tax benefits for shareholders of the company who are eligible for Business Asset Disposal Relief. This was previously known as Entrepreneurs Relief until 6th April 2020.

This lets the director sell all or part of their business and pay just 10% in Capital Gains Tax on profits over the lifetime of the business up to a limit of £1 million.

This is great news for directors as it can save them a small fortune on their tax bill and is one of the main benefits to closing a solvent company through an MVL.

For more guidance on Business Assets Disposal Relief and how it can benefit you, check out our handy guide.

Creditors’ Voluntary Liquidation

Unlike Members’ Voluntary Liquidation, Creditors’ Voluntary Liquidation is a type of voluntary liquidation open only to insolvent companies.

There are two main ways to test if your company is insolvent, including:

  • The cash flow test: this establishes whether a company can pay its bills and day to day costs. If it can’t fulfil these commitments, it is deemed insolvent.
  • The balance sheet test: this establishes whether a company has more assets than liabilities. If so, it can be deemed insolvent.

Like an MVL, a CVL is a formal insolvency process that liquidates a company, bringing its trading and operations to an end. It is also a completely voluntary process that is initiated by a company director.

There are many reasons why a CVL may occur. It is usually the best option for companies that are longer sustainable and are operating at a loss.

A director might choose this route as it is better for them to take control and act before they are forced into liquidation.

A licensed Insolvency Practitioner will be appointed to carry out the CVL and ensure the best outcome for creditors.

For more help, check out our complete guide to everything you need to know about Creditors’ Voluntary Liquidation.

Clarke Bell are here to help

Whether you are applying for an MVL or CVL, Clarke Bell is here to help.

Our friendly team can offer expert insolvency advice to help you find the best route forward whatever the circumstances.

Over the past 28 years we have helped thousands of businesses with the liquidation process, so you can rest assured you are in safe hands.

We will work closely with your company to get to know your situation and get you on the right track. To find out more about how we can help you get in touch today.