A liquidation can be described as the “liquidating of assets” in order to release cash. This cash can be used to pay off creditors in the event that the business is insolvent or it could be paid to shareholders/members of any company if there is a surplus. Any liquidation of the assets of a business would mean that if a company owns the assets then it is also liquidated and its affairs come to an end. Liquidation is not quite the same as selling all of the physical assets as a complete liquidation means selling the goodwill, orderbook, brand, debtors everything.
If you want to liquidate your company then there are 2 main processes.
For insolvent companies there is Creditors Voluntary Liquidation and for solvent companies, with surplus cash, there is Members Voluntary Liquidation
Creditors Voluntary Liquidation
Creditors Voluntary Liquidation (CVL) is a process that allows a company to be wound up voluntarily by its shareholders and creditors. It is a formal insolvency procedure that is initiated by the directors of a company when they believe that the company can no longer continue to trade profitably. The directors then call a meeting of the shareholders to obtain their approval for the liquidation, and a meeting of the creditors to appoint a liquidator.
The process is called “creditors voluntary liquidation” because it is the creditors who ultimately decide whether the liquidation will go ahead or not. The creditors have the power to appoint the liquidator, who will then take control of the company’s affairs and liquidate its assets. The proceeds from the liquidation are used to pay off the company’s debts to its creditors in a prescribed order of priority.
Members Voluntary Liquidation
A Members’ Voluntary Liquidation, or MVL, is a way for solvent companies that have hit the end of their useful life to close their business in a formal way. This usually happens when the company’s directors no longer need it, either because they’ve retired or because they’re starting something new and want to release cash for the new venture.
The main benefit of an MVL is that it lets money be taken out in a way that is tax efficient. This is because money taken from a business through an MVL is treated as a capital gain instead of income, so it is taxed by the Capital Gains Tax instead of the Income Tax. As an added incentive, Business Asset Disposal Relief can be used, which, if you apply, will reduce CGT to just 10% up to a lifetime limit of £1m in gains.
MVLs cost money, so companies that need to spread more than £25,000 are usually the only ones who can use them.
If you are considering liquidating your business or company then there are a number of important steps to make sure of first.
- Do not sell any assets at below their market price
- Do not transfer any assets to another business or company
- Do not pay off one creditor before another because you desire them to be better off.
- Do not carry on trading if the position of the creditors is likely to get worse.
- Do not make people redundant if the business is insolvent. A liquidator needs to do this and they will be compensated.