There are two ways of voluntarily winding up a company; either through a Creditors Voluntary Liquidation (CVL) if the company is insolvent, or a Members Voluntary Liquidation (MVL) if the company is solvent.
With a CVL, the company is insolvent, i.e. its debts outstrip its cash flow and assets, and its creditors’ are demanding payment. In this situation, the directors are able to make the decision to liquidate the company, usually before the creditors’ issue a winding up order through the court and force the company into liquidation.
With an MVL, the company is solvent and able to meet its financial commitments within 12 months of the company closing. There are a variety of reasons why a company that is solvent is being closed down, such as retirement or the company is no longer required, and the directors have made the decision to wind up the company.
Winding up an insolvent or solvent company
The steps involved in winding up a company are always conducted by a licensed insolvency practitioner (IP). Whether it is solvent or insolvent, the process is basically the same. Sometimes, the IP may recommend the company enter administration whilst a possible business rescue solution is considered, which means any creditors are not allowed to take any legal action during this period.
A key duty of the IP, or liquidator, is to sell any assets at market value to realise capital, which is then distributed to the creditors in a priority order, as set out by the Insolvency Act 1986, if an insolvent company. If the company is solvent, whilst any tangible assets are still sold, they are to raise capital as part of selling all the business assets for distribution between directors, and pay back shareholders in respect of their initial investment and dividend due. Shareholders sell their shares on which they are able to claim Business Asset Disposal Relief, as long as they meet HMRC’s strict criteria. Once the liquidation process has been completed, the company is removed from the Companies House register and no longer exists.
In the majority of cases, directors of an insolvent company will opt for a Creditors’ Voluntary Liquidation rather than being forced into liquidation by creditors. A CVL procedure allows directors to write off the company’s unsecured debts that haven’t been personally guaranteed by directors.
The steps for winding up a solvent company are slightly different in that directors who want to close, or liquidate, a company have to do this through a Members’ Voluntary Liquidation (MVL) process. There are a number of reasons why a solvent company may close, such as for tax reasons, the company is no longer required or the directors wish to retire.
Before an MVL can commence with a solvent limited company, the directors must sign a declaration that states there are no current creditors, i.e. there aren’t any tax arrears with HMRC and they do not have any outstanding debts.
There are five principal steps to liquidating an insolvent or solvent limited company:
- The directors of the company appoint an IP to act as liquidator in either a CVL or an MVL process. This appointment must be approved by the company’s shareholders for the appointment to become official and the liquidation process to commence.
- The directors hand over power and the company’s activities to the IP who starts the liquidation process and manages the company’s affairs. In most cases with a solvent company, the directors will work closely with the liquidator. With an insolvent company, at least one director must be available to answer the liquidator’s questions.
- The insolvent limited company’s assets are assessed, valued by an independent body and realised (liquidated) at market value. The directors are entitled to purchase any assets but it must be done through the IP and must be bought at market value price. The same applies to a solvent company; the difference being that realised capital is distributed among creditors with an insolvent company, and among owners, directors and shareholders with a solvent company.
- Once the IP’s fees have been settled, any realised asset funds remaining from an insolvent company are distributed to the creditors by the IP in a priority order, as laid out by the Insolvency Act 1986. With a solvent company, any final payments to suppliers are paid, corporation tax, VAT and any other HMRC payments are settled, shareholders’ initial investment and dividend are paid, and what’s remaining is distributed to owners and directors.
- If there is any surplus revenue, which in most cases there isn’t, this is distributed to the shareholders by the IP.
- Once the IP has concluded the documentation, investigated the directors for any potential fraudulent or wrongful trading, and reported to the court on the liquidation process, they will make an application to Companies House to have the company declared dissolved and it is removed from the register.
There is no limit to how long a CVL or an MVL will take; it depends on how big the company is, the level of debt and the complexity of the company structure. However, in general, the process can take as little as a couple of months.
Whether it is an insolvent or solvent company that is going through the steps involved in winding up a company, the liquidator has to investigate the activities of the company directors before and during the liquidation process to ensure that there has not been any fraudulent or wrongful trading. Directors must ensure they have acted responsibly and in the best interests of the creditors/shareholders at all times. If any fraudulent or wrongful trading is proved, the directors may become personally liable for all or some of the company’s debts.
When it comes to distributing any realised assets by the liquidator, there is a priority order that must be followed, once the IP’s fees have been paid:
- Secured creditors including those with a legal charge on a company asset
- Expenses incurred by the insolvent estate
- Preferential creditors including employees
- Unsecured creditors
In the case of employees, their wages and any wage arrears, holiday pay and notice pay are covered in accordance with specified statutory limits by the Redundancy Payments Office of the Department of Trade & Industry.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt or are considering winding up a solvent company, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.