FAQs

CVL

  1. What is a CVL?
  • A Creditors’ Voluntary Liquidation – or CVL – is a formal insolvency process for insolvent limited companies. If a company is experiencing extreme financial distress, and there is no realistic chance of being able to turn around its fortunes, the company can be liquidated which will bring all company affairs to an orderly end. A CVL can only be entered into under the guidance of a licensed insolvency practitioner. It will be the insolvency practitioner’s job to assess the company’s position, identify company assets, and liaise with all outstanding creditors throughout the process. Once all assets have been realised and the proceeds distributed to creditors, the company will be formally dissolved and its name eventually removed from the register held at Companies House. All remaining debts – except any which have been personally guaranteed – will be written off and the company will cease to exist as a legal entity.
  1. What happens to debts after liquidation?
  • One of the main benefits of trading as a limited company is that directors are given the protection afforded by limited liability. This means that the company and its director are classed as two separate legal entities; in other words, the company is responsible for its own debts. If a company becomes insolvent and subsequently enters a formal liquidation process, any company debts which remain after all assets have been realised, will be written off. However, in some instances, directors can find themselves responsible for the debts of their insolvent company following liquidation. The main reason for this because a director has provided a personal guarantee for company borrowing. A personal guarantee may be requested by a bank or other finance providers as a condition of the loan. As long as the company is able to make the monthly repayments on this borrowing, the director will not be personally liable. However, if the company enters liquidation, the personal guarantee will crystallise, and responsibility for repaying the borrowing will transfer to the individual who provided the guarantee.
  1. Who initiates a CVL?
  • A CVL is a voluntary liquidation process which is initiated by the director(s) of a distressed limited company. Many company directors choose to place their company into liquidation when it is clear it has no future. By doing this, directors are protecting the interests of the company’s creditors and helping to mitigate any further losses, as per their legal duty as the director of a knowingly insolvent company. The alternative is that a company is forced into compulsory liquidation. This would happen when outstanding creditor(s) petition the courts for the company to be wound up. In compulsory liquidation, a Winding Up Petition would be served on the insolvent company, and if the company is not in a position to defend this or settle the outstanding liability, the court will order that the company is wound up. The Official Receiver would be appointed who would set about identifying company assets and conducting an investigation into the conduct of the company’s directors.
  1. Is a CVL right for my company?
  • Whether a CVL is appropriate for your company depends on a range of factors including the financial position of the company, the likelihood of the business being able to return to a profitable position, and the desire of its directors to effect a recovery. In some cases, liquidation is the only realistic option, particularly when it comes to ensuring you do not worsen the position of your creditors. For some businesses this may mean that they have to cease trade immediately in order to prevent further losses being accrued, while others may be able to continue to trade temporarily if this would allow for a better financial return for creditors. Insolvency is a highly complex area therefore it is always advisable to seek the advice of a licensed insolvency practitioner at the early signs of insolvency. They will be able to assess the position of your company and help you understand your options. If liquidation is the most appropriate next step, they will be able to place your company into a CVL and ensure an orderly winding up of its affairs.
  1. What is the role of an insolvency practitioner in a CVL?
  • As a formal insolvency process, a CVL can only be entered into under the guidance of a licensed insolvency practitioner who will adopt the role of the company’s liquidator. It will be their role to take an overview of the company’s financial and operational position, and determine whether a CVL is the most appropriate course of action. If it is, then they will be responsible for identifying company assets, realising the value for the benefit of creditors, and distributing the proceeds according to a determined hierarchy. Once this process is complete, the insolvency practitioner will arrange for the company to be formally dissolved and its name removed from the Companies House register. The company will cease to exist as a legal entity at this point, and any outstanding debts, which have not been secured with a personal guarantee, will be written off.

MVL

  1. What is an MVL?
  • A Members’ Voluntary Liquidation – or MVL – is a formal liquidation process designed as a way for solvent companies to wind down their operations. An MVL can be the most tax-efficient way to extract the proceeds of a profitable company, before closing it down. All proceeds taken from a company using an MVL will be distributed as capital rather than income. This means the money will be subject to capital gains tax, rather than income tax, which can represent a considerable tax saving; Entrepreneurs’’ Relief can reduce tax liability can be reduced even further. MVLs are typically suitable for those companies with in excess of £25,000 to distribute to shareholders, however, a licensed insolvency practitioner will be able to confirm whether an MVL is the most appropriate closure method for your solvent company.
  1. What is Entrepreneurs’ Relief
  • Entrepreneurs’ Relief is a valuable tax relief scheme which reduces your liability for capital gains tax (CGT). When Entrepreneurs’ Relief is used, CGT is reduced to an effective rate of just 10%; this is what makes extracting the proceeds of a company by way of an MVL so appealing. Entrepreneurs’ Relief is subject to a lifetime limit of £1m per individual although there is no limit to the amount of businesses you can sell while utilising Entrepreneurs’ Relief, so long as the £1m worth of capital gains is no exceeded. In order to qualify, you must have held a minimum shareholding of 5% for at least two years from the time the company enters liquidation.
  1. Is an MVL right for my company?
  • MVLs are only suitable for solvent companies. However, if your company is solvent and has over £25,000 to distribute, and you are looking to close down the business and extract these profits, then an MVL is likely to be the best solution. The alternative way to close a solvent company is by having it struck off – or dissolved – at Companies House. This is a much cheaper option than an MVL, but it could end up actually costing you more when you take into account how the distributions will be taxed. Taking money out of the business by way of dividends is likely to incur a higher rate of tax when compared to extracting this as a capital distribution. However, if you have a relatively modest level of funds within the company, an MVL may not be required. You are strongly advised to discuss your options with a licensed insolvency practitioner who will be able to confirm whether an MVL will be the most cost-effective option for you and your company.
  1. What is the difference between an MVL and dissolution?
  • An MVL is a formal liquidation process which must be undertaken with a licensed insolvency practitioner. Dissolution – or company strike off – on the other hand, is an informal closure option for companies with no outstanding liabilities. Dissolution can be achieved by submitting a DS01 form and paying the applicable fee – currently £8. An MVL is a much more involved process, and the additional time coupled with the required input of an insolvency practitioner, means it is a much more costly option. However, when it comes to how proceeds are taken from the company, this cost could be negated in tax savings. Profits taken out of the business prior to dissolving it, will be treated as income, whereas money is taken out of the business through an MVL is classed as a capital distribution. The effective rate of CGT can be reduced even further if shareholders qualify for Entrepreneurs’ Relief.
  1. What is the difference between an MVL and a CVL?
  • MVLs and CVLs are both formal liquidation processes, however, there is a key difference. A CVL is an insolvent liquidation process suitable for companies who are experiencing financial issues and have a number of outstanding liabilities which they are not in a position to settle. MVLs, however, are designed as a way for solvent companies to be closed down while allowing for any money tied up in the company to be extract in a cost-effective and tax-efficient manner. Both processes do require the input of a licensed insolvency practitioner, who will be responsible for liquidating company assets and ensuring outstanding liabilities are dealt with. In the case of a CVL, the money obtained through the selling of company assets will be distributed amongst outstanding creditors; whereas this money would be paid out to shareholders in an MVL. In both processes, the end result is the company being wound down and removed from the Companies House register. Which process is right for you is determined by your company’s financial position at the time of liquidation.

Administration

  1. What is administration?
  • Administration is a formal insolvency procedure, which is often used to bring about the rescue of a business experiencing financial problems. A licensed insolvency practitioner will be appointed to act as the company’s administrator and they will assume control of the company and its operations from that point. In the vast majority of cases, the aim will be to save the company and get it back on a solid financial footing, helping to preserve jobs and minimise the impact on creditors. Not all companies will be suitable for the administration process, however, and administrators must be able to demonstrate that it serves a purpose. Administration must either look to save the company from closure, or else maximise creditor returns. If you are considering administration, a licensed insolvency practitioner will be able to advise whether this is appropriate for your company, and if not, they will be able to suggest what your alternative options are.
  1. What is a moratorium in administration?
  • When a company enters administration, it is granted a temporary moratorium. A moratorium can be seen as a legal ringfence which is placed around the company, preventing creditors from initiating litigation proceedings. This can give a company valuable breathing space allowing for a plan to be formulated by the appointed administrators. It is often the case that when companies get to the stage of needing to be placed into administration, that legal action has already commenced or has been threatened. The moratorium immediately eases pressure and ensures the next step for the company can be carefully considered rather than being pressured into making a decision which may not be right for the company or its creditors.
  1. What is a pre-pack administration?
  • A pre-packaged – or pre-pack – administration process involves the sale of a company to either a connected or unconnected party. A pre-pack sale will be arranged before administrators are formally appointed, which can help to minimise any disruption to trade and provide a continuation of employment to employees. A company can be sold to a third-party buyer, or alternatively, the existing directors can set up a new company – or ‘newco’ – and purchase its assets at a fair market value. Employees will be transferred over to the newco through a process known as TUPE. Only viable businesses will be able to be sold through a pre-pack process, and the newco must have adequate funding in place to complete on the deal. Rules surrounding pre-pack administration are extremely complex, and this can end up being a costly process, however, in some instances, it is the best way for a viable company to continue trading.
  1. What happens after administration?
  • A company cannot remain in administration indefinitely, however, there is not one sole route out of administration. Some companies may be able to continue trading following an element of restructuring and/or refinancing of company liabilities. Other companies may be sold as part of the administration, whether by way of a pre-pack sale, or a sale on the open market to an unconnected buyer. If the company is seen as ultimately viable, yet its liabilities are too great to be sustainable, it may be the case that the company exits administration and immediately enters an alternative formal process such as a Company Voluntary Arrangement (CVA). Should all attempts to save the company fail, there may be no option but to place the company into liquidation using a CVL process.
  1. What happens to employees in administration?
  • A company going into administration does not necessarily mean that the business will cease to exist; in fact, rescuing the company as a going concern is often the main objective. This means that employees do not necessarily lose their jobs once a company enters this type of insolvency process, as would be the case in liquidation. Employment rights will be adopted by the administrator after 14 days, meaning this period is crucial for employees. Should the company subsequently be sold, employment contracts will be transferred over to the new company through a process known as TUPE. If, however, the company fails to find a buyer, or all attempts to otherwise save the business fail, the company could find itself entering liquidation, which would lead to redundancies. If you are considering administration and are worried about how this will affect your employees, a licensed insolvency practitioner will be able to talk you through the whole process and explain what each option would mean for your staff.

Director Redundancy

  1. What is director redundancy?
  • Director redundancy is similar to staff redundancy in that it provides a financial lifeline to individuals who have lost their job through no fault of their own. As a limited company director it is likely you are also classed as an employee, meaning if your company enters an insolvent liquidation process such as a CVL, you will be eligible to make a claim for redundancy just like your employees would. As long as you are paid a salary through PAYE, and work more than 16 hours per week for the company in a role which is more than purely advisory, it is highly likely you will have a valid redundancy claim.
  1. How much redundancy could I claim?
  • The amount of redundancy you will be entitled to will be based on a variety of factors including your age, length of service, and the salary you paid yourself through the company. Length of service is capped at 20 years, and there is also a weekly wage limit. As well as redundancy, you may also be able to claim for a number of additional statutory entitlements including notice pay, holiday pay, and unpaid wages. Although these additional elements will be subject to tax, they could increase your total pay-out by a considerable amount.
  1. Do I qualify for director redundancy?
  • In order to qualify for director redundancy, you must meet a set criteria. You are likely to have a successful claim for redundancy so long as:
      1. You are on the payroll of your company
      2. You have a minimum of two years’ service with the company
      3. You work at least 16 hours per week for the company
      4. You are employed in more than merely an advisory role
      5. You have a valid contract of employment
  1. What can director redundancy pay be spent on?
  • At a time when money is likely to be tight, a redundancy payment could be a much-needed lifeline. There are no restrictions on what director redundancy can be used for; it is your money to do as you wish. For some, they choose to use the money to start up a new business venture, others put the money towards basic living costs while they source alternative employment. As putting a company into a voluntary liquidation process costs money, some directors find the redundancy payment useful for recouping these costs. Essentially, once the redundancy pay-out is in your bank account, it is yours to spend in the best way you see fit for your situation.
  1. Where does the money for director redundancy come from?
  • Typically when a company makes redundancies, it is the responsibility of the company to pay for all redundancy costs. However, when a company is insolvent, there is simply not enough money within the business to do this. In this instance, the redundancy is paid by the Redundancy Payments Service (RPS) via the National Insurance Fund. This applies to both staff and director redundancy costs. The RPS then become a preferential creditor of the company during the liquidation, and will seek to recoup their costs when the distribution of company funds is made.