Closing Your Company. Which Type Of Liquidation Is Best For You?

As a company director, liquidation may be the last thing on your mind, especially if you want to keep that company trading.

While liquidation is still associated with companies that either can’t afford to repay their liabilities or are on the brink of collapse, the process can also be useful for directors of solvent companies that are no longer needed or if they wish to retire.

As liquidation is a formal process with a lot of aspects to consider, you cannot undertake the process yourself. Speak to a licensed insolvency practitioner if you wish to close your company or if it would be the best option in your circumstances. They will assess your company’s situation and inform you of your options.

This article will detail the types of liquidation available and which, based on a company’s circumstances, would be the most suitable option.

Your Company Can Afford To Pay Its Debts

While the word ‘liquidation’ can carry negative connotations, often associated with insolvency, the two are not mutually exclusive. Solvent companies can enter liquidation for several reasons:

• Directors wish to retire or no longer want to run the business, don’t want to go through the process of selling the company, or don’t have an immediate successor.

• The company is being re-organised or merged as part of a larger corporate restructuring process.

• While the company may still be profitable, the market may have changed, making the company unviable in the long term.

If this applies to your company, then it could close through a solvent Members Voluntary Liquidation (MVL).

An MVL can be a more tax-efficient process than closing the company through dissolution, and if it has more than £25,000 in assets, including cash in its bank account, directors and shareholders could claim Business Asset Disposal Relief (BADR). This reduces the amount of Capital Gains Tax you’ll have to pay on the funds distributed post-liquidation.

Your Company Is Insolvent

A company entering liquidation while insolvent is the more common scenario and one that can come with a negative association.

Depending on a company’s circumstances, liquidation may not be the only option if it has unaffordable amounts of debt. A formal repayment arrangement may be an option if the company has a viable business model, and restructuring through administration may be possible if the company could be rescued as a “going concern”.

If the previously mentioned options aren’t feasible, or creditor pressure has reached a stage where it’s impossible to continue trading, then closing through an insolvent Creditors Voluntary Liquidation (CVL) may be its best option.

During a CVL, the company closes in an orderly manner, with a line drawn under its unsecured debts, employees made redundant, and all legal action stopped. If you’ve acted in the company’s best interest leading up to and during the period of insolvency, you can move on after the liquidation and start a new business should you wish to.

Closing voluntarily through a CVL is generally considered preferable to compulsory liquidation.

Your Company Is Being Wound Up

Compulsory liquidation can come about if company directors ignore reminders and legal action from creditors or if they cannot afford a liquidation.

Creditors can force a company into compulsory liquidation if that company owes them more than £750. This is done by filing a winding-up petition, which becomes a winding-up order once granted and is advertised in the London Gazette. Afterwards, the company’s bank accounts freeze, making trading impossible.

Without the directors obtaining a validation order, the company will be forced into compulsory liquidation, and the directors will have very little control over the process.

To Conclude

While liquidation may have negative associations, it can be the best way forward for your company, even if it is solvent.

An MVL will close a solvent limited company through a more tax-efficient process than dissolution and could allow the directors and shareholders to claim BADR and pay less Capital Gains Tax on the money received post-liquidation.

A CVL could be the best way forward for companies struggling or unable to repay their debts and where other insolvency procedures wouldn’t be suitable. A line would be drawn under the company’s debts, allowing the directors to walk away if they’ve acted in the company’s best interest.

Compulsory liquidation follows a winding-up petition and is often considered a last resort for companies.