Many people hear the word liquidation and automatically think it is a negative process for businesses that are in trouble and suffering from insolvency.
This article is going to explain why you would choose a liquidation process and the difference between a solvent and insolvent liquidation process.
WHY CHOOSE A LIQUIDATION PROCESS?
Whether a company is struggling with insolvency or is in fact, just looking for a way to close down their solvent business effectively, there is a liquidation process to suit.
For an insolvent company many directors may think that they can trade out of their troubles or just stop trading with the hope of no one noticing; this hardly ever works out. Choosing a liquidation process will ensure all loose ends connected to the company are tied up and will ensure a clean break is provided for all directors and shareholders.
WHAT IS A SOLVENT LIQUIDATION?
The term “solvent” means that a company’s assets exceed their liabilities and that the company are able to pay all of their creditors in full within 12 months; including statutory interest.
A Members’ Voluntary Liquidation (MVL) is the formal liquidation process which is used to close down the affairs of a solvent company. The alternative process to this is an informal option called Strike Off.
Since the changes to the ESC C16 legislation in 2012, in order for a distribution of funds that exceeds £25,000 to receive automatic capital tax treatment (this is where distributions are classed as capital receipts rather than income) an MVL process will need to be used. This system replaces the former HMRC concession which would have previously been used in order to receive the tax benefits.
These tax benefits are the main reason companies use an MVL process. There is also the possibility of receiving the personal tax relief known as Entrepreneurs’ Relief against the funds. If this relief is available, the tax rate can be reduced down to a very low 10%. This tax saving therefore usually outweighs the cost of the liquidation process itself.
The process of an MVL is also deemed to be a huge benefit to the directors as it provides the chance to dissolve a company in the correct way and not leave any unattended issues behind. The process can also be seen as a benefit to the accountant as it would provide further chargeable hours of work for them in order to prepare the accounts needed in this process.
WHAT IS AN INSOLVENT LIQUIDATION?
The term “insolvent” means that a company can no longer pay their creditors as and when payments are due, and their liabilities exceed their assets.
A Creditors’ Voluntary Liquidation (CVL) is a formal liquidation process used to close down the affairs of an insolvent company.
A CVL is the voluntary liquidation process initiated by the directors and shareholders of the company. It is the process of closing down the insolvent company and for the assets of the Company, if any, to be sold in order for a return to be made to Creditors of the Company where possible. This process will require an Insolvency Practitioner to be appointed as liquidator in order to manage and oversee the process accordingly.
This process compared to a Compulsory liquidation, which is instigated usually by a creditor through the Courts, gives the director the flexibility of deciding on whom the Insolvency Practitioner will be. It also offers them the chance to purchase the assets and goodwill of the business at a fair value from the Liquidator if they wish to start afresh in a new trading company.
For more information with regards the Liquidation procedures mentioned in this article please visit www.liquidation.co.uk.
For free professional advice please contact the dedicated AIA helpline: 08450 70 59 59 or visit the dedicated AIA member Insolvency portal: www.fasimms.co.uk/aia-portal.