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Liquidation - What it means for your business

Liquidation, also referred to as winding-up or dissolution, is the process in which a business (or part thereof) ceases to operate and the assets and property are redistributed.

For businesses, Liquidation falls into three distinct options dependant on the current state of the business. They are: Creditors Voluntary Liquidation, Compulsory Liquidation and Members Voluntary Liquidation.

Each option is subject to the rules and regulations of the Insolvency Act 1986, but both Creditors Voluntary Liquidation and Compulsory Liquidation occur when the business is insolvent and either the liabilities exceed the assets, or the business is unable to pay its debts as they fall due.

Creditors Voluntary Liquidation

In a Creditors Voluntary Liquidation (CVL) directors of the business have chosen to voluntarily place the company into liquidation. To enter into CVL, the directors appoint an insolvency practitioner as liquidator of the business so that the winding up process can start. Once appointed the insolvency practitioner will liaise with the business’s creditors and begin the process of selling the businesses assets in order to repay creditors.

One of the benefits of entering into CVL is that the business will immediately receive advice and assistance from a licensed insolvency practitioner, which will reduce the likelihood of the business facing misconduct allegations or being accused of wrongful or fraudulent trading.

Compulsory Liquidation

Compulsory liquidation is the procedure by which a business is forced into liquidation by its creditors in order to recoup outstanding debts. Creditors achieve this by selling off the businesses assets. A compulsory liquidation order can only be implemented if a business owes creditors a debt of more than £750.

For all businesses, it is advisable to avoid compulsory liquidation wherever possible as it will result in the company having to cease trading, being struck of the registrar within 3 months and the business’s bank accounts being frozen two weeks before liquidation.

Compulsory liquidation can only be avoided if the amount due to creditors is paid or new and manageable payment terms are agreed.

Members Voluntary Liquidation

A Members Voluntary Liquidation (MVL) is a process that is used to save on tax, and can be put into place when a business has assets above £25,000 and has stopped trading. An MVL will mean the end of the business’ life, but the value of the business will be extracted in the form of cash which means that instead of being charged Income Tax, you will instead be charged Capital Gains Tax. An MVL is essentially a tax efficient way of paying out shareholders and closing the business down.

It is however important to note that a business can only enter into a MVL if they are able to prove the current business is solvent and able to repay all existing and prospective debts within a 12 month period. It is a serious offence if a business is insolvent and enters into a MVL knowingly; this can result in company directors being banned from acting as a director of any other limited company in the UK, up to a period of 15 years. If the business is found to be insolvent after entering into an MVL, a liquidator will conduct an investigation to determine whether or not the business went into an MVL with fraudulent intentions. If so, the MVL can be converted to a Creditors Voluntary Liquidation.

If your business is facing liquidation, it is important to understand the differences and seek professional advice from licensed insolvency practitioners.

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About David Kirk

David Kirk of Kirks Insolvency based in the South West, has over 20 years dealing with insolvent businesses and has helped thousands of businesses steer a route through their financial problems.

This was posted in Bdaily's Members' News section by David Kirk .