While liquidation is often associated with insolvent companies that canât pay their bills on time, they are not mutually exclusive. There can be instances where solvent companies can enter liquidation, and it may be more beneficial than closing through a dissolution or continuing to trade.
When considering liquidation as a way forward for your company, youâll need to take all your companyâs circumstances into account.
Is your company solvent or insolvent?
How youâll close your company will depend on whether it is solvent or insolvent. You should always be aware of your companyâs solvent position and take action as soon as youâre aware it may be insolvent.
Your company is solvent if it has enough assets, including cash at the bank, to repay all its liabilities on time. Even if the company is solvent, you might want to close it if you wish to retire without selling the company or without a successor, if the market has changed, or a change in industry or government rules means that the company is no longer profitable or useful.
If your company is insolvent, it cannot pay its liabilities when they fall due, or it has more liabilities than assets. While not a definitive sign of insolvency, legal action from creditors can also be a strong indicator.
Regardless of its solvent position, to put your company into liquidation, you must engage a licensed and regulated insolvency practitioner. These professionals can provide impartial, confidential advice and are licensed to carry out the processes.
Solvent company liquidation
As the name suggests, a company must be solvent to enter a solvent Members Voluntary Liquidation (MVL), and it must have at least ÂŁ25,000 in assets, including cash at the bank.
It can be a cost-effective and tax-efficient option to close your company, potentially reducing the amount of Capital Gains Tax you and the other directors and shareholders have to pay. This is done via Business Asset Disposal Relief.Â
If your company wouldnât benefit from a solvent liquidation, you can close the company through a dissolution, ending its legal existence and striking it from the Register of Companies at Companies House.
Insolvent company liquidation
Company insolvency doesnât automatically mean you have to put it into liquidation. Depending on your circumstances, it might be possible to put the company into a recovery process like a Company Voluntary Arrangement (CVA) or to restructure it through administration.
If that isnât possible, either due to the level of debt or creditor pressure, the insolvency practitioner will advise you to put the company into an insolvent Creditors Voluntary Liquidation (CVL). This will have the insolvent company closed in an orderly manner, drawing a line under its debts and, if youâre not subject to any disqualifications or restrictions, allowing the directors to leave and start a new company free from the old oneâs debts.
What happens after liquidation?
Once the liquidation is complete, in most situations, youâre free to move on and start afresh. This can even be the case if your company entered an insolvent liquidation. As a company director, you benefit from limited liability protection, meaning the companyâs debts are separate from your personal finances. This still applies as long as you acted in the companyâs best interests during the period of insolvency. However, if you continued trading while knowing that the company was insolvent, or actively participated in wrongful or fraudulent trading, then you could lose that limited liability protection, be disqualified from acting as a director in the future and even face criminal prosecution.
To conclude
Despite its frequent association with insolvency, both solvent and insolvent companies can enter liquidation, though the exact process varies based on that company's solvent state.
Regardless of whether your company is solvent or insolvent, youâll have to speak to a licensed and regulated insolvency practitioner if you want to liquidate. They are the only people who can carry out these formal processes. Solvent companies can close via a Members Voluntary Liquidation (MVL), while insolvent companies should close through a Creditors Voluntary Liquidation (CVL). After the liquidation, youâre free to move on and start afresh, as long as youâve acted in the companyâs best interests.
