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What are the three different types of liquidation?

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Understanding compulsory and voluntary closure of limited companies

Three different types of corporate liquidation exist in the UK. Each procedure is used under specific circumstances, and the initial choice is led by whether the company is solvent or insolvent.

A solvent company can use Members’ Voluntary Liquidation (MVL) to close down following the distribution of funds to shareholders. For insolvent companies, Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation are the two procedures.

Insolvency is established by testing different aspects of the company’s affairs using the cash flow, balance sheet, and legal action tests. In summary, if the company can no longer pay its day-to-day bills as they become due, or the total value of its liabilities is greater than its assets, it’s likely to be insolvent.

So let’s look at the three types of liquidation, starting with the two procedures for insolvent companies.

1.      Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation, or CVL, enables you to close down your insolvent company, and gives due regard to your statutory duties as a company director. These duties include placing the interests of creditors first, to ensure they don’t suffer unnecessary financial loss.

Further losses could occur if you let the company carry on trading when it’s insolvent. For example, if you took out further lines of credit or borrowing that the company couldn’t repay.

The appointed liquidator realises company assets, distributes the proceeds to creditors, and then formally closes the company down. An investigation into director conduct then follows, but as you’ve been proactive in protecting your creditors, the likelihood of wrongful trading allegations is minimised.

CVL and director redundancy

A significant benefit of entering CVL is the potential to claim director redundancy pay. You may be able to do so if you’ve worked as an employee of the company for two years or more, as well as being a director.

Eligibility also relies on receiving a regular salary through your payroll, and working for a minimum of 16 hours per week. If you get in touch with UK Liquidators, we’ll be able to confirm your own entitlement to redundancy pay.

2.      Compulsory liquidation

This type of liquidation is triggered by creditor legal action, and although the procedure has the same result, the possibility of misconduct allegations is far higher. This is because you’ve waited for a creditor to take court action, rather than being proactive and protecting creditor interests as a whole.

Creditors’ Voluntary Liquidation offers key benefits when compared with compulsory liquidation – you can choose when to enter CVL, and also appoint your own choice of liquidator.

3.      Members’ Voluntary Liquidation (MVL) for solvent companies

Members’ Voluntary Liquidation enables a solvent company to be closed down in an orderly manner, and is typically suitable for companies with £25,000 or more to distribute.

The process is commonly used when a business has run its course and serves no further purpose. Its tax efficiency is a significant benefit, as funds are taxed as capital rather than income.

A member’s tax liability is also further reduced if they’re eligible to claim Asset Disposal Relief (ADR), which was formerly known as Entrepreneurs’ Relief. This brings their tax liability down to 10%, as long as they’re below a lifetime limit set by the government of £1 million.

Is voluntary dissolution an alternative to liquidation?

Company dissolution is an alternative to solvent liquidation, and may be suitable if a company has less than £25,000 of profits to distribute. It must be stressed that it’s not appropriate for insolvent companies, however, as the main criterion is that businesses have to be able to repay all their creditors, plus interest.

Formal liquidation procedures must be conducted by a licensed insolvency practitioner, who realises company assets and distributes the proceeds to creditors in the case of an insolvent liquidation, and to company members in an MVL.

UK Liquidators offers a partner-led service, providing independent advice and support to directors of solvent and insolvent companies. Please get in touch to arrange a free, same-day consultation – we operate a broad network of offices around the UK.

Jonathan Munnery
Insolvency & Restructuring Expert

If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.

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