What Are the Different Purposes & Types of Liquidation in the United Kingdom?

There are different types of liquidation that exist in the UK, and each of these forms of liquidation could be used depending on what the business’s circumstances are. Specific circumstances apply to specific procedures, and one of the first things to consider is whether the organisation in question is solvent or insolvent.

A solvent company has the ability to use a Members Voluntary Liquidation in order to close down after they have distributed the correct amount of funds to shareholders. If a company is insolvent, then they are going to either need to enter into Creditors’ Voluntary Liquidation or Compulsory Liquidation.

In this article, we will be having a look at these three different types of liquidation and what their purposes are as well.

Creditors Voluntary Liquidation

Creditors Voluntary Liquidation (otherwise known as CVL) allows you to take the steps necessary to close down your insolvent business and as the company director, it gives you due regard to all of your statutory duties. This includes the likes of putting your creditors’ interests first so that you can ensure they won’t suffer any kind of unnecessary financial loss as a result of the liquidation.

If you allow your company to carry on trading even when it is insolvent, then you might end up suffering further losses as a result. For instance, if you continue to take out further lines of credit and borrow money that the company is in no position to repay, this will just result in debt and further losses.

Whoever is appointed as the liquidator of the company under CVL will be responsible for releasing company assets, distributing the proceeds of the assets to the creditors and then taking steps to formally close down the company. There will then be an investigation into director conduct, but since you have been mindful of ensuring your creditors are protected and don’t suffer large losses, the likelihood of any kind of wrongful trading is slim.

One of the main benefits of entering CVL is that you might be able to claim redundancy pay as the director. This applies if you have worked as an employee of the company (and the director) for two years or more. Whether you can claim will also depend on whether you have received a regular salary through your payroll and if your working week consisted of at least 16 hours per week. If you would like to know whether or not you will be successful in claiming redundancy pay, then you should contact experts on liquidation.

Compulsory Liquidation

This kind of liquidation is triggered whenever a creditor enters some kind of legal action. The actual procedure of this liquidation is the same as CVL; however, the difference is that because of the legal action, the possibility of misconduct allegations is a lot higher than it would be previously. The reason for this is that you have waited for a creditor to take legal action against you rather than being able to appreciate the current circumstance you are in and be proactive in protecting the interests of your creditors.

When you compare compulsory liquidation with that of CVL, you can clearly see that there are a lot more benefits that come with CVL. These include the fact that you choose to enter into it, and you are also responsible for appointing your own liquidator.

Members Voluntary Liquidation

Members Voluntary Liquidation (otherwise known as MVL) is used when a solvent company wants to be closed down in an orderly manner. This is typically the best option available for companies that have £25,000 or more that they would like to distribute throughout their liquidation.

This process is most commonly used when a director recognises that their organisation has run its course and, as such, there is no further purpose that they could fulfil by staying open. This method is a lot more tax efficient and has significant benefits, which include the fact funds are going to be taxed as capital rather than as income.

The tax liability of members is further reduced if they can claim Asset Disposal Relief (otherwise known as ADR). This was previously referred to as Entrepreneurs Relief. The tax liability of members will be brought down by about 10% as long as they are below the lifetime limit which has been set by the government.

What About Voluntary Dissolution?

Voluntary Dissolution is an alternative to solvent MVL. This method is suitable if the business in question has less than £25,000 worth of profit that they can distribute. This process is not appropriate for companies that are insolvent either because the main criteria that have to be fulfilled are the business is in a comfortable enough position that they are able to repay all of their creditors as well as interest.

Do You Need Assistance with Liquidation?

When it comes to liquidation within the UK, there are a number of different Types of Liquidation available to you, depending on the position that your business finds itself in. If you are insolvent, then the two choices are Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation. If your company is solvent, then the best option available to you is Members Voluntary Liquidation (MVL). Solvent companies also have the option of entering into voluntary dissolution, but this is mainly used if the profits they have to distribute come to less than £25,000.

Formal liquidation procedures within the UK have to be carried out by a licensed insolvency practitioner. These are going to be able to realise company assets and distribute the necessary amount to creditors in order to protect their interests. If your business needs some kind of assistance with its liquidation, be it choosing a method or executing the procedure they deem most appropriate, you should be sure to get in touch with professionals.

Insolvency Services in UK

At Simple Liquidation, we have a team of experts on hand who are here to help you. If you would like any assistance whatsoever or have any questions you need answers to then, please do not hesitate to get in touch.