Unlike Compulsory Liquidation, where a company is forced to close, Voluntary Liquidation occurs when the directors and shareholders decide to wind-up the company and place it into Liquidation. This is an entirely voluntary process that brings the company’s trading and operations to an end.
As a formal insolvency process, a licensed Insolvency Practitioner must be appointed to carry out the Voluntary Liquidation process, and it is not a decision to be taken lightly.
If you are considering Voluntary Liquidation, there are some essential factors and questions to take into consideration.
To help, Clarke Bell has put together this complete guide to Voluntary Liquidation, covering what it is, how it works, and who should take this route.
What is Voluntary Liquidation?
A Voluntary Liquidation process is initiated by a company director or owner and can only be carried out upon approval of 75% of the shareholders.
Voluntary Liquidation is the process of officially winding-up and dissolving a company, letting it liquidate its assets, which can, in turn, be used to free up funds or pay off debts.
Once Voluntary Liquidation has been completed, the company is dissolved and taken off the registrar of companies.
Why choose Voluntary Liquidation?
There are several reasons a company would choose to go into voluntary Liquidation.
This is often the route taken by insolvent companies that are no longer sustainable and are operating at a loss. However, solvent companies can also enter into voluntary Liquidation.
Many solvent companies will choose this option as a tax-efficient way of closing their business, perhaps because a key staff member is retiring. The director is taking a step back to an employee role or moving abroad.
Whatever the reason for going into voluntary Liquidation, we will look at the different types of voluntary Liquidation available to find the best option for you.
Members’ Voluntary Liquidation
One form of voluntary Liquidation is Members’ Voluntary Liquidation (MVL.)
An MVL is a route open to solvent businesses that can pay their bills and typically have assets of £25,000 or over. This is usually the route taken by directors that no longer want or need their company. As we have already mentioned, this could be for many reasons, whether they are retiring, moving away, or they opened the company for a specific purpose that has been fulfilled.
This is a prevalent option for company directors of solvent businesses as it allows them to close their business in an HMRC approved, tax-efficient manner.
With an MVL, any funds taken out are subject to Capital Gains Tax rather than income tax. There are also further advantages for those that qualify for Business Asset Disposal Relief (this was known as Entrepreneurs’ Relief before 6 April 2020.)
With Business Asset Disposal Relief, eligible directors who are selling all or part of their business will pay just 10% in Capital Gains Tax on profits over the business’s lifetime up to a limit of £1 million. This is a considerable saving compared to income tax, which they would otherwise be charged, set at a rate of 18% at the basic level and 28% at the higher level.
Creditors’ Voluntary Liquidation
An MVL is an option available to solvent companies, but what about insolvent companies?
For businesses that are no longer sustainable, can’t cover their day-to-day costs, pay their bills, and are being chased for payments, a Creditors’ Voluntary Liquidation (CVL) is the best option.
Again, this is an entirely self-imposed process compared to a Compulsory Liquidation in which a company is forced to close.
A CVL is usually the best route to take if you have creditors asking for money to be repaid and you wish to avoid being forced into compulsory Liquidation. It also allows you to protect your finances from your business debts.
Whether you use the MVL or CVL process, both are legal procedures, and therefore, a licensed Insolvency Practitioner must be appointed to carry out the Liquidation.
How to choose the right Insolvency Practitioner
Entering into voluntary Liquidation is a big decision, and the Insolvency Practitioner you appoint can significantly impact the outcome. That’s why it’s essential to do your research and find the right Insolvency Practitioner to work with.
There are a few key things to look out for in an Insolvency Practitioner. First, you must ensure they are fully licensed. A qualified, licensed Insolvency Practitioner can only carry out voluntary Liquidation as a formal insolvency procedure.
You should also check that the Insolvency Practitioner has experience in your industry and with similar cases to yours. This will ensure they can bring their expertise to find the best solution for you.
Finally, it is crucial to ensure the Insolvency Practitioner has a good reputation, has been trading for a long time, and has a proven track record of success.