Liquidation – A brief guide for businesses

Liquidation is sometimes also called the winding-up or dissolution of a company, and is the process in which the firm will cease to operate and its assets and property are sold-off or otherwise redistributed.
In terms of business liquidation there are three main types – Creditors Voluntary Liquidation, Compulsory Liquidation and Members Voluntary Liquidation. Each is subject to regulations of the Insolvency Act 1986.
Creditors Voluntary Liquidation (CVL)
In a CVL the business directors voluntarily choose to put their firm into liquidation. A licensed insolvency practitioner is appointed as liquidator and starts the process. The insolvency practitioner liaises with creditors and sells assets in order to repay them what they are owed.
The business gets immediate, tailored and expert advice from their insolvency practitioner, which could help minimise the stress and ensure everything goes smoothly.
Compulsory Liquidation
This means that the business is forced into liquidation by creditors so that they can recoup the money they are owed. The business assets are sold off to pay back the debts. A compulsory liquidation order can be made if a firm owes its creditors more than £750.
Compulsory liquidation means the firm has to cease trading and is struck off the register within three months. Its bank accounts are frozen two weeks before liquidation.
This situation can sometimes be avoided if creditors can be paid back or if a repayment plan can be agreed.
Members Voluntary Liquidation (MVL)
An MVL can be used if a business has assets of more than £25,000 and has stopped trading. It means the end of the firm, but the value can be extracted in the form of cash, so Capital Gains Tax rather than Income Tax will be due. This makes an MVL a tax-efficient way of paying shareholders and closing a business.
A firm can only enter an MVL if it can be shown that it is solvent and able to repay all debts within 12 months. If the business is insolvent and enters an MVL knowingly this is a serious offence and directors can be banned for up to 15 years.