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solvent businesses

Insolvency Practitioners and Solvent Businesses?

Authored by Phil Meekin

Phil Meekin

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Approximate read time: 3 minutes

It is understandable to assume that insolvency practitioners (IP) only deal with insolvent businesses or those that have no future. It’s what it says on the tin. But that isn’t always the case, just like any other company solvent businesses still need to be efficiently and professionally closed down.

Solvent liquidations

Often, licensed IPs manage companies undergoing the process of a Members Voluntary Liquidation (MVL); the liquidation of limited companies which are solvent – where all creditors receive full payment.

For many companies, MVL’s are a low cost, tax-efficient way of withdrawing investments in a company where distributions are expected to be in excess of £25,000. Such distributions are subject to Entrepreneurs Relief at 10% (subject to a £10 million lifetime limit).

solvent businesses

Why would a solvent company choose to liquidate?

There are several reasons why solvent businesses would close through a liquidation rather than a dissolution.

  • The shareholders wish to remove their investment from the company.
  • The directors of the company wish to retire.
  • The company is no longer profitable, but the business can cease while ensuring a surplus to the shareholders.
  • There has been a breakdown in the relationship between directors or shareholders of the company.

Management issues

In some situations, the core business will be viable and profit-making. However, the business could run into problems amongst its management which could lead to financial difficulty.

For example: A member of the management could be taken ill, or even pass away. Similarly, a manager could have a domestic problem which takes them away from the company. These issues may be present in larger organisations, which can usually fall back on existing staff to assist with the extra demands, but smaller companies without such resources could find these situations harder to handle and may look to a solvent liquidation.

Withdrawal of investment

The change in circumstances may mean the current owners decide they want to withdraw their investment in the business. It could involve a management buy-in (MBI) where an external figure raises funds for the business and is brought on as part of the management team. Alternatively, the current management team could perform a management buyout (MBO); wherein the existing managers purchase a portion of the company from its main owners or parent.

To achieve the best result possible, the company should prepare to ensure it is attractive to investors. Doing so is new territory for many directors and shareholders, and both processes need input and assistance from specialists.

Why should I use an MVL instead of a strike-off?

When most directors look to close a solvent business, they’ll most likely think of dissolution. That said, depending on what you’re looking for, you could see more benefits from choosing an MVL. While an MVL is more expensive than a dissolution, the benefit from Entrepreneur’s Relief outweighs the cost and will actually see you take more home from that of a dissolution.

Capital taken from the company is taxed as Capital Gains Tax and not income as it is with a dissolution. There’s also less risk of personal liability with an IP managing the process, which also means less stress.

In summary

Despite their title suggesting otherwise, insolvency practitioners don’t just deal with insolvent businesses. Often, they will manage companies wishing to pursue a Members Voluntary Liquidation (MVL); closing solvent businesses. Companies can do this due to removal of investment, a retiring director, a breakdown in management or to ensure all creditors receive some payment before a solvent business becomes unprofitable.

More information about Members Voluntary Liquidations

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