What is Liquidation?
Essentially, liquidation is a formal process to close your limited company. When the liquidation process starts, your business assets are sold to repay creditors and the business closes down. Once this has happened your company ceases to exist as a legal entity and any outstanding debts will be written off (unless the director has personally guaranteed these borrowings). The company name will remain on Companies House, but its status will switch to ‘Liquidation’. The removal of the name only happens after dissolution (approximately three months after liquidation has taken place.)
If you are considering liquidating your limited company, there are three ways to do it: Creditors’ Voluntary Liquidation (CVL), Compulsory Liquidation, and Solvent Liquidation (MVL).
Creditors’ Voluntary Liquidation (CVL)
When creditors (the people you owe money too) begin threatening legal action, and there is no hope of rescue or recovery, it’s often in everyone’s interest to enter a Creditors’ Voluntary Liquidation (CVL).
A CVL is started by a company’s directors. While it’s a voluntary process, a CVL is only entered when there are limited alternatives for the company.
This process helps creditors get the highest potential return because the company’s assets are sold as part of the process.
As the director of a limited company, you have a number of legal obligations you must adhere to once you are aware your company is insolvent. One of these is placing the interests of your creditors above those of the company and its shareholders.
In the case of compulsory liquidation, it’s the creditor who forces the company into liquidation. If a creditor is owed £750 or more by the debtor company, they can petition the court for its winding-up.
This normally happens after a Winding Up Petition (WUP) has been issued by one or more of the company’s creditors.
An Official Receiver will be allocated by the courts, and their role will be to identify any company assets, realise these for the benefit of outstanding creditors, before formally winding up the company.
Solvent liquidation (MVL)
When a company reaches the end of its life (i.e. the directors have no use for the business anymore or they want to move onto a new venture), the directors can choose to close the business down. This form of liquidation is called Members’ Voluntary Liquidation (MVL) and it’s how solvent companies can formally close their business.
An MVL procedure also requires the input of a licensed insolvency practitioner, and results in the closure of a company following distribution of its assets amongst creditors and shareholders.
To begin the process of placing your company into liquidation, your directors and/or shareholders must appoint a licensed insolvency practitioner (IP). If you appoint Middlebrooks, we will act as your IP and take control of the company and ensure its affairs are wound up in an orderly manner.
As your appointed liquidator, we will realise company assets and make distributions to your creditors. Although these are our main responsibilities, we will also carry out other tasks, including:
As a formal insolvency procedure, liquidation can only be entered into following the appointment of a licensed insolvency practitioner. We would take on the role of liquidator and be responsible for a number of things during the process including liaising with creditors, identifying and recovering company assets, and distributing the proceeds of these according to a designated hierarchy. In a solvent liquidation, proceeds will be distributed to shareholders, while in the case of an insolvent liquidation, any recoverable funds will be split amongst the company’s outstanding creditors.
For a CVL, shareholders can nominate a liquidator during the general meeting where the CVL procedure is discussed. Within 14 days of the company being placed into a CVL, directors must seek for the creditors’ approval of the nomination. If the creditors do not approve, they can put forward their own choice of liquidator, which trumps the shareholders’ nomination.
For a MVL, shareholders can pass an ordinary resolution during the general meeting to appoint the liquidator.
For compulsory liquidations, the court will appoint a civil servant (known as an ‘official receiver’) as a liquidator when making a winding up order.
Once a liquidator is appointed, they will take control of the business.
A winding up petition can be made by a range of parties including:
The court will take into account any instances where the company failed to pay its debts. For example, where the company fails to comply with a statutory demand or where the company fails to execute a judgment in favour of the creditor.
Alternatively, the insolvency ground may be established if the company’s accounts show that it has more (current and potential) liabilities than assets.
Once a liquidator is appointed, company directors lose their control over the company and can no longer act on behalf of the company.
Where a director’s negligence contributed to the company’s insolvency, they may be convicted of wrongful trading (ie allowing the company to continue trading when they knew or ought to have known that the company is incapable of repaying its debts). If convicted, directors will be held personally liable for any debts incurred by the company as a result of their negligence.
We explain the process of a Members Voluntary Liquidation here.
Essentially, the decision to liquidate must be voted upon by shareholders, following which the liquidator (insolvency practitioner) takes care of the rest of the process.
Recent changes to legislation have meant that a MVL process must be used for any final shareholder distribution of funds that exceed £25,000 in order to receive automatic capital tax treatment. This system has replaced a HMRC concession that was used previously to receive the tax benefits.
These tax benefits are the main reason limited companies opt for an MVL. There is also the possibility of receiving Entrepreneurs’ Relief against the funds, which could potentially reduce the tax rate to 10%. This significant tax saving, therefore, usually outweighs the cost of the liquidation process itself.
If you’re still feeling confused, feel free to drop us an email or give us a call.