It’s a fairly common misconception that liquidation is a process that is applicable only to insolvent companies, as a way to release assets to pay creditors. Many people also assume that insolvency practitioners can only help businesses that are insolvent. The truth is that liquidation can also be an option for a solvent company and insolvency practitioners can provide guidance to business owners seeking to wind up their company.
Liquidation for a Solvent Company
A lot of companies that are placed into liquidation are insolvent, so they are unable to continue as a business. In many cases, this is because the company is unable to pay the money owed to creditors as it falls due, so the best solution is to voluntarily liquidate the company in order to release assets in the best interests of creditors.
Whilst liquidation is certainly a suitable option for insolvent companies, it can also be used to wind up a business that is not experiencing financial difficulties. Should company directors and shareholders wish to close the company and release its assets, a Members Voluntary Liquidation (MVL) may be a suitable choice.
Why choose an MVL?
There are a few reasons that company directors may choose to voluntarily liquidate a solvent business, for example:
- The company was set up for a particular project or contract that is now complete
- Freelancers have decided to take up full time employment, so there is no purpose for their limited company
- Company directors wish to retire and close down the business
- The business is now outdated and cannot remain viable
In order for a company to be eligible for MVL, as well as being solvent, there are also certain qualifications that must be met:
- The company must have been trading for at least 1 year minimum
- Company reserves must exceed £25,000 once creditors have been paid
- Directors must refrain from trading as a limited company for a minimum of 24 months after the MVL process is complete.
For solvency companies that meet the criteria above, a Members Voluntary liquidation can be a beneficial choice. Under an MVL, once the company is liquidated, profit can be received as capital rather than as a dividend, paying capital gains tax (CGT) rather than income tax. Under an MVL, capital gains tax can be reduced to just 10% when Entrepreneur’s Relief is leveraged. As a result, in some cases, an MVL can provide the best financial outcome for the liquidation of a solvent company.
How do insolvency practitioners help with winding up a solvent company?
An MVL is a formal liquidation procedure for which a licensed insolvency practitioner must be appointed. An IP will guide company directors through the liquidation process, ensuring that the business has ceased to trade, will have sufficient funds left to qualify for MVL once creditors are paid, the process of deregistering the company for corporation tax, VAT and PAYE/NIC is complete or in progress, and that company accounts and returns are filed up to the date the business ceased to trade.
Once the above proceedings are completed, company directors must make a declaration of solvency. This requires a closing financial statement to be sworn before a solicitor by all (or a majority) of directors. Once the declaration is sworn, a shareholders meeting must be held within 5 weeks to ensure all shareholders agree to the company’s liquidation and to appoint an IP as liquidator. Once a licensed liquidator is appointed, this is published in the London Gazette and the insolvency practitioner takes over the company from directors.
Once the liquidator gains power of the company, assets can be released and distributed first to creditors, and then to directors/shareholders.
If you are a director of a solvent company that you wish to formally close, then a licensed insolvency practitioner can help. Visit www.beaconllp.com for more information.