Solvent or insolvent liquidation: Which is right for my company? 

When looking to close a limited company, liquidation is a go-to option for many directors. 

There are a few factors to consider when determining whether solvent or insolvent of liquidation is right for a company. The company’s solvent position is often the main contributing factor in deciding which liquidation type to pursue. 

Insolvent liquidations 

Insolvent liquidations are the ones you’re most likely to hear about in downbeat news reports. When a limited company accrues a large amount of debt, and those liabilities outweigh the company’s assets, then the company is insolvent. 

The liquidation process for insolvent companies is a Creditors Voluntary Liquidation (CVL). Initiated by a licensed insolvency practitioner, a CVL closes the limited company in an orderly, structured framework, allowing the employees to claim redundancy and for the directors to move on. 

Scenarios where an insolvent liquidation might be suitable:

• The company cannot afford to repay its liabilities when they fall due.

An insolvent liquidation is commonly used when a company has fallen into debt and cannot repay its creditors. If the debts are of such a level that recovery isn’t a feasible alternative, the directors can close the company. Thanks to the limited liability protection provided by limited companies, directors can walk away once the process is complete as long as they have done their duties as directors and there’s no evidence of wrongful trading. 

• Creditor pressure is affecting the company. 

Failing to repay the company’s debts when they fall due is a tell-tale sign of insolvency, and creditors can take action to recover what they’re owed. Such action could start as reminder letters and telephone calls but can easily progress to County Court Judgements (CCJs) and even bailiff action. 

• Other attempts at debt recovery or restructuring have failed. 

While other arrangements are available for insolvent companies before they must resort to liquidation, their suitability depends on the company’s circumstances. For example, the company may need to undergo a liquidation because the other options, such as repaying through a Company Voluntary Arrangement (CVA) or restructuring through an administration, either haven’t been suitable or have previously failed.  

Solvent liquidations 

While liquidation is often linked with insolvent companies, it can be used to close solvent, limited companies if the directors wish to. Entering a Members Voluntary Liquidation (MVL) offers benefits over applying for a simple dissolution. 

It’s important to note your company cannot enter an MVL if it is insolvent. 

Scenarios in which a solvent liquidation might be suitable:

• Directors want a more tax-efficient closure than from a dissolution.

An MVL works best where the company has £25,000 or more to distribute to its shareholders. The funds can be distributed without the imposition of the income tax associated with a dissolution. Depending on the company’s circumstances, directors may also qualify for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief). 

• The company has reached the end of its useful life. 

If the company is outdated in its current form, caters to a market that no longer exists, or was set up for a specific purpose that is now complete, then an MVL can close the solvent company in an orderly manner. 

• Change of circumstances. 

An MVL can be useful if the directors’ circumstances change and a limited company structure is no longer suitable for the business, or the directors no longer want to head their own company. For example, if a company’s directors were a married couple now undergoing a divorce, or the directors wish to retire with no successor and not sell the company, or pursue employment elsewhere, then an MVL can be a fast and efficient way to close the company that’s no longer needed. 

Summary 

Both solvent and insolvent companies can enter a liquidation, although which procedure they will undergo depends on their solvent position. Insolvent limited companies can undergo a Creditors Voluntary Liquidation (CVL), closing the company in an orderly manner and allowing the directors to walk away and start afresh. Directors who wish to close a solvent company they no longer need can do so via a Members Voluntary Liquidation (MVL), allowing the directors to claim Business Asset Disposal Relief where appropriate.