Liquidation means that a company is being closed and its assets sold. While the word is more commonly used to deal with insolvent businesses, it may also be used to refer to the process of closing down a solvent limited company.
In this article we’ll explore both processes, and what they mean for you as a director.
Let’s take a look at solvent and insolvent liquidation in more detail.
Solvent Liquidation Definition
Sometimes a director wishes to close the company for personal reasons. He may be retiring, or perhaps the market landscape has changed and the business is no longer viable. In these circumstances, and where the business has assets, solvent liquidation may be the most appropriate solution.
Solvent liquidations are known as a Members Voluntary Liquidation and require the services of a licensed insolvency practitioner to complete.
How Do You Close Down a Solvent Company?
We explain the process of a Members Voluntary Liquidation here.
Essentially, the decision to liquidate must be voted upon by shareholders, following which the liquidator (insolvency practitioner) takes care of the rest of the process.
Since 2012, a company closed by striking off, without a liquidation, can pay out up to £25,000 in total to shareholders as capital, provided it has collected, or intends to collect, what it is owed and has paid, or intends to pay, its debts. If the total goes over £25,000, the whole amount loses capital treatment, not just the part above the limit. This rule replaced a HMRC concession that was used previously to receive the tax benefits. For larger sums, a formal liquidation such as an MVL is normally needed for capital treatment. Capital treatment is not automatic. HMRC can treat a winding-up distribution as income where, among other conditions, the shareholder carries on a similar trade or activity within two years and a main purpose is to reduce income tax.
These tax benefits are the main reason limited companies opt for an MVL. There is also the possibility of Business Asset Disposal Relief, formerly Entrepreneurs’ Relief, which reduces the Capital Gains Tax rate on a qualifying gain to 18% for disposals from 6 April 2026, subject to the qualifying conditions, the lifetime limit and the anti-avoidance rules. The main Capital Gains Tax rates from 6 April 2026 are 18% within the basic rate band and 24% above it, so the relief saves tax only on the part of a gain that would otherwise be taxed at 24%. The saving comes mainly from capital rather than income treatment of the distribution.
Insolvent Liquidation definition
the term insolvent means that a company is unable to meet its liabilities as and when they fall due, or that its debts exceed its assets.
In this scenario, A Creditors’ Voluntary Liquidation (CVL) is a formal liquidation procedure that is used to close down an insolvent company. This is a voluntary process, which is initiated by the company’s directors/shareholders and it involves realising or selling the assets of the company to pay back creditors. This procedure requires the appointment of a licensed Insolvency Practitioner (IP) to manage the process.
Advantages of Choosing a Voluntary Insolvent Liquidation
Compulsory liquidation is a court process, usually started by a creditor’s petition, though the company or its directors can also petition. A CVL gives directors more say. They can propose the liquidator, but the creditors can nominate a different one. Where the two differ, the creditors’ choice stands, although any director, member or creditor can apply to the court within 7 days of the creditors’ nomination for the company’s nominee, or someone else, to be appointed instead. Directors may offer to buy the assets or goodwill from the liquidator if they wish to start afresh with a new trading company. A person who was a director or shadow director of a company at any time in the 12 months before it went into insolvent liquidation must not, for 5 years from the start of the liquidation, be a director of, or be concerned in promoting, forming or managing, any other company with a prohibited name. A prohibited name is the liquidating company’s name, or one so similar as to suggest an association. The same applies to carrying on a business under such a name. The exceptions are leave of the court or the circumstances set out in the Insolvency Rules.
What is Solvent and Insolvent in Accounting?
On a balance-sheet view, a company is solvent if its assets are worth more than all its liabilities, including contingent and prospective ones. In law that is not enough on its own: a company that cannot pay its debts as they fall due is insolvent whatever its balance sheet shows. Accountants use ratios to assess a company’s solvency. For instance, the interest coverage ratio divides operating income by interest expense to show whether the company is able to pay the interest on its debt, with a higher result indicating a greater level of solvency.
Accountants also use the debt-to-assets ratio, which divides the company’s debt by the value of its assets to indicate whether a company has taken on too much of a debt burden.
Solvency ratios can vary depending on the industry in which the business operates. Ratios that indicate a lower solvency than the industry average may suggest that the company is heading for financial problems.
Can We Help?
If you are uncertain about the insolvency process and would like to know more about corporate insolvency tests which can determine whether a company can meet its liabilities as they fall due, please call 0208 444 3400 or email info@aabrs.com today for free and confidential advice from one of our professional advisers.