Voluntary liquidation is a formal process that brings a company to a close by selling off its assets to pay creditors, after which the business is dissolved. In the UK, this process is often initiated when a company is no longer viable or the directors decide it has served its purpose. There are two main types of voluntary liquidation: Members’ Voluntary Liquidation (MVL) and Creditors’ Voluntary Liquidation (CVL). Though both lead to the closure of a company, the reasons for choosing them and the processes involved are quite distinct.
Members’ Voluntary Liquidation (MVL)
An MVL is undertaken when a company is solvent — that is, it can pay all of its debts in full within 12 months. This route is commonly chosen by directors who wish to retire, reorganise their affairs, or simply wind up a dormant or no longer needed company in an orderly manner. The process starts with the directors making a declaration of solvency, which must be sworn before a solicitor. This confirms the company’s ability to settle all liabilities, including contingent ones.
Once this declaration is filed with Companies House, the shareholders pass a resolution to wind up the company and appoint a licensed insolvency practitioner (IP) as the liquidator. The liquidator takes control of the company’s assets, realises them (i.e., converts them into cash), pays off any outstanding creditors, and distributes the remaining funds to shareholders. Once everything is settled, the company is removed from the register at Companies House.
MVLs are often used as a tax-efficient method for extracting value, particularly where Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) applies, which can reduce Capital Gains Tax on the distributed funds.
Creditors’ Voluntary Liquidation (CVL)
In contrast, a CVL is initiated when a company is insolvent and cannot meet its financial obligations. This type of liquidation is often the result of unsustainable debts or persistent trading losses. Directors, recognising the financial difficulties, opt for a CVL to take control of the situation and avoid more severe outcomes, such as compulsory liquidation by court order.
To begin a CVL, the directors must call a meeting of shareholders to pass a resolution to wind up the company. They must also notify the creditors and hold a creditors’ meeting (now usually held virtually or in writing) where they appoint an insolvency practitioner as the liquidator.
The liquidator’s role is to take stock of the company’s assets, investigate the directors’ conduct leading up to the insolvency, and distribute any funds recovered to creditors in accordance with a legally defined hierarchy. Secured creditors (those with a legal charge over assets) are paid first, followed by preferential creditors (such as employees owed wages), and then unsecured creditors. Shareholders are last in line and typically receive nothing in an insolvent liquidation.
Key Consequences and Considerations
Once a company enters voluntary liquidation, it ceases to trade, and the directors’ powers are suspended (unless specifically retained by the liquidator). Any employment contracts are typically terminated, and the company’s bank accounts are frozen.
Directors are required to cooperate fully with the liquidator, providing all company records and explaining past decisions. While MVLs are generally straightforward, a CVL involves scrutiny of director conduct, and wrongful or fraudulent trading could lead to disqualification or personal liability.
Final Thoughts
Voluntary liquidation can be a practical and controlled way to close a company. An MVL allows solvent companies to wind down efficiently and extract profits in a tax-effective way. A CVL offers directors a chance to responsibly deal with insolvency, preserving some control and potentially mitigating reputational damage.
In either case, seeking professional advice early is crucial. A licensed insolvency practitioner can assess your situation, advise on the best course of action, and ensure compliance with all legal obligations, helping to achieve the best possible outcome for all stakeholders involved.