There are three types of liquidation; each resulting in the closure of a company, and which type is best for your company depends on whether it is solvent or insolvent.
An aspect all types of liquidation have in common, is all assets are realised during the process, allowing the company to maximise its return to creditors.
Creditors Voluntary Liquidation – CVL – Insolvent liquidation
A CVL is a formal insolvency procedure used to close an insolvent company. If company debts have become unmanageable, liabilities cannot be paid, and you know the business cannot continue to trade, you may want to put an end to things and close the company.
The process is instigated by the directors and enables the company’s insolvency to be dealt with quickly. A CVL will see the whole company liquidated, with the realisation of any assets used to maximise a return to creditors. Any remaining debts will die with the company.
The following are some of the benefits a CVL offers:
- Directors or shareholders may be able to purchase the assets after liquidation, continuing the business in a new limited company.
- Gives directors more control over the business’ closure.
- Reduces the risk of wrongful trading.
- Laid-off employees are entitled to redundancy payments via the Redundancy Payments Office.
Members Voluntary Liquidation – MVL – Solvent liquidation
An MVL is available to directors of solvent companies. This means the company has sufficient assets to settle all liabilities in full, plus statutory interest within a given period of less than 12 months.
An MVL is useful if directors or shareholders retire, or if the business has just come to the end of its life. An MVL is, generally, more tax-efficient than a dissolution and allows for tax relief via Business Asset Disposal Relief (Entrepreneur’s Relief).
- Tax-efficient, avoiding the imposition of income tax associated with dissolutions.
- Potentially allow for a quick release of cash from the liquidated business, and fast distribution.
Compulsory liquidation is often considered the last resort in terms of company closure and involves a court process. While directors can instigate, it is primarily creditors that petition for a winding-up order, which results in compulsory liquidation.
Directors have little, if any, control over a compulsory liquidation. If you feel your company has no future, a Creditors Voluntary Liquidation (CVL) is generally preferable. A CVL can give you breathing space as a director and allow the company to close in a more orderly manner.
Restart your company
A pre-pack liquidation is a process, wherein a newly formed company purchases the assets of an old one and sets up the same business, with a new trading name, as a different entity. This is also known as a newco.
The old company is liquidated, removed from Companies House along with historical debt, whilst allowing the directors to re-purchase assets and equipment to restart the company from scratch.
Pre-pack liquidation can potentially offer several benefits to an insolvent company:
- Pre-pack liquidation can allow the business to continue via a ‘phoenix company’.
- Releases the newco from the oldco’s debts.
- Potentially provides a better return for creditors than a straightforward liquidation.
- The oldco’s employees can, potentially, go on to work for the newco.
We have a three-step process which helps us ensure we get all the right information about your company and the best results for you.
- Firstly, we will discuss your company’s current situation and look to find the best option for your business. We will look at the overall financial position of your company and consider the best ways to proceed.
- After a meeting with one of our senior consultants, we will have a better idea of what outcome you desire, and we will be able to advise best on this. It could mean setting up a repayment plan such as a Company Voluntary Arrangement (CVA) or liquidating the company.
- When we have found the right solution for you, and we have been officially appointed, we will start the work and the official process for your desired option.
There are three types of liquidation, with each process designed to liquidate a company in a different state of solvency.
If a business is solvent, it involves a very different route to an insolvent company. If you recognise the company cannot continue in its current form, you should act fast. In some situations, liquidation can even be taken out of a director’s hands. Creditors could become so frustrated, that they issue a winding-up petition and try to force you into compulsory liquidation.
How we can help
The process of liquidating your company can be very daunting and confusing. If you believe your business is insolvent, or your company is facing insolvency, and you’re unsure of the most appropriate course of action, get in touch. We have an experienced team of advisors who can guide you through the types of liquidation available, and help you decide the best route forward.
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