Liquidation is a formal insolvency process administered by a licensed insolvency practitioner who will assume the role as liquidator during the process. Liquidation can be used to close both solvent and insolvent companies, and can be entered into voluntarily by the directors and shareholders, or forced upon the company following a court petition by its creditors. There are three main types of liquidation:
- Creditors’ Voluntary Liquidation:
Creditors’ Voluntary Liquidation (CVL) is the most common type of liquidation, and is used to bring an insolvent company to a formal and orderly end. A CVL is entered into voluntarily by the insolvent company’s directors who appoint a licensed insolvency practitioner (IP) to oversee the process. The company’s assets are sold, and the proceeds are used to pay off outstanding creditors as far as possible. Any debt which remains after all company funds have been used will be written off and the company will cease to exist as a legal entity.
- Members’ Voluntary Liquidation (MVL):
Members’ Voluntary Liquidation (MVL) is used when a solvent company wants to wind up its affairs and distribute its assets among shareholders. It’s a tax-efficient way to close a limited company, as the distributed assets will become subject to capital gains tax rather than income tax. Shareholders may also be able to take advantage of Business Asset Disposal Relief (BADR), lowering the tax rate payable even further. An MVL requires the appointment of a liquidator to handle the process.
Compulsory liquidation is similar in process to a CVL, however, as the name suggests, a compulsory liquidation is forced upon the company by order of the courts rather than entered into voluntarily. The compulsory liquidation process is initiated by the company’s creditors, often due to unpaid debts. In this scenario, the court orders the company’s closure, and a liquidator is appointed to sell assets and settle outstanding debts. Directors and shareholders have limited control over the process.