Many businesses will experience some level of financial pressure at some point in its lifecycle. For some this will be a temporary tightening of cash flow which is quickly solved; in other cases, however, this problem becomes terminal, and the company has no option other than to cease trading and bring the business to a formal end. This can be done through a process known as liquidation.
There are three main types of liquidation:
- Creditors’ Voluntary Liquidation (CVL) – This is a director-initiated process which brings about the end of an insolvent company. The company’s directors voluntarily appoint an insolvency practitioner who will take the steps necessary to wind down the company. The insolvency practitioner will liaise with creditors, sell assets, and formally close the company with Companies House once all outstanding issues have been dealt with. Unless the directors have signed any personal guarantees, they will not be held liable for the outstanding debts of the company in the vast majority of cases.
- Compulsory Liquidation – An insolvent company can be forced into liquidation should its creditors petition the courts to have the company compulsorily wound up. This is the most serious step a creditor can take against a company which owes it money. Applying to have a company wound up by the courts is an expensive process, however, creditors will choose this option once all other efforts to collect the money they are owed have been exhausted.
- Members’ Voluntary Liquidation (MVL) – An MVL is a way to formally a close a solvent, yet no longer wanted, company. This could be due to retirement or simply a desire to close the company and move onto a new business venture or employment opportunity. Opting for liquidation in this situation could be a more tax-efficient and cost-effective way of extracting the money tied up within the business rather than dissolving the business at Companies House. When a company is placed into an MVL, money extracted is taxed as Capital Gains; whereas when a company is dissolved informally, the money take out is treated as income and taxed accordingly.
If you are considering liquidation for your company, you must seek the services of a licensed insolvency practitioner to facilitate this process on your company’s behalf.