No business owner likes to hear the term liquidation, and we all think we know what it means. What comes to mind is the traditional creditors’ voluntary liquidation (CVL). But there is a different, less common, form of liquidation: members’ voluntary liquidation.
While a CVL smacks of a failed business and all the negative connotations that go with it, a members’ voluntary liquidation carries no such connotations, and in fact its qualifying criteria are very different.
Why Is Members’ Voluntary Liquidation Different?
The main difference between this form of liquidation and the more common CVL is that to carry out a successful members voluntary liquidation the company must be solvent and able to pay all creditors within 12 months of the liquidation.
Although this liquidation is advertised in the Gazette and is made public it is not an insolvency procedure, so there are no negative effects on your reputation.
However, if during the process the liquidators discover that the company is in fact insolvent the procedure is converted to a CVL and all it entails. This can happen because more creditors than expected make claims or because liabilities in the form of debts have not been accurately accounted for and tip the company into insolvency.
When To Consider Members’ Voluntary Liquidation
There are three main reasons why you would opt for this form of liquidation:
1. Retirement. If you are retiring this lets you to wind up the business in a proper fashion.
2. Stepping Down From The Business. If you have decided to step down from running your business but find that nobody else wants to take over the reins.
3. Closing The Business. You’ve decided that you no longer want to run the business.
After all creditors have been paid what is left over is then distributed among the company members.
Taxation on a members’ voluntary liquidation is applied as if the distributed assets are capital instead of income. Owners of trading companies are usually able to claim Entrepreneurs’ Relief. This generous tax relief reduces capital gains tax down to 10% if the gains are under £10 million.
What Happens During The Liquidation Process?
After the declaration of insolvency has been made by the directors the following steps are made before a members’ voluntary liquidation.
A meeting with shareholders is held 5 weeks later to pass a resolution agreeing to the voluntary liquidation.
The resolution must be advertised in The Gazette within 14 days of it being passed.
An authorised insolvency practitioner is appointed to act as liquidator.
Within 15 days of passing the resolution the signed declaration must be sent to Companies House.
Undergoing a members’ voluntary liquidation can be a clean and straightforward method of closing down a business at the end of its life. However taking professional advice is recommended because failing to understand the financial obligations can lead to it ending in a CVL.
HW Fisher’s business recovery team can give you expert advice on all aspects of members’ voluntary liquidation.