If you’re thinking of closing your solvent company, then it’s likely that you want to get the best out of the situation for everyone involved. In this blog, we’re providing you with solvent liquidation advice, enabling you to maximise returns for shareholders.
What is a solvent company?
A solvent company can afford to pay its debts on time, and its assets are worth more than its liabilities. Usually, a solvent company does not have any outstanding debts, as it can afford to pay them when they fall due.
Solvent companies will not owe any money to suppliers, HMRC or staff members.
A solvent company can be closed in various ways. You should consider the tax implications of a solvent liquidation.
Before you select a solvent liquidation method, it’s vital that you seek professional support. Choosing the wrong method can be stressful, so it’s better to do your research early than leave it until it’s too late.
Strike-off method
This is not recognised as a formal procedure, but the outcome is the same. A company strike-off is also known as a company dissolution. A company that uses this method must have no outstanding debts, including bounce-back loans.
This method is popular because it is often recognised as the fastest and cheapest way to close a company down. It costs just £33 and can be completed by filling out a DS01 form on the government website.
The strike-off process is usually straightforward if there are no outstanding debts. At the end of the process, the company is removed from the Companies House register and ceases to exist.
What happens to shareholders during the strike-off process?
The dissolution process can be unfavourable when trying to maximise the outcome for shareholders. If a company is struck off while still owning assets, those assets typically pass to the Crown as bona vacantia (ownerless property). This means that shareholders will not be able to access these following the process.
There are steps that can be taken to protect these assets, but the processes must be carried out correctly and legally. This process requires strategic planning and cannot be used by an insolvent company.
It’s also worth noting that a company that used the strike-off method can be reinstated for a while afterwards for debts or asset recovery. Reinstatement typically requires evidence such as outstanding debts or ownership of undistributed assets.
Members’ voluntary liquidation (MVL)
A members’ voluntary liquidation is a formal procedure that allows for the company’s assets to be distributed among shareholders as capital.
For this process to be completed effectively, a licensed insolvency practitioner must be appointed. They will be responsible for the whole process and will request information from you at various stages.
MVLs are known as a favourable solvency procedure due to their significant tax advantages. In this process, directors and shareholders can benefit from Capital Gains Tax rather than income tax.
Additional tax benefits may be available to some directors, where they can use Business Asset Disposal Relief and reduce the tax they pay to just 10% (Business Asset Disposal Relief was previously known as Entrepreneurs’ Relief).
During this solvent liquidation process, an insolvency practitioner will assess all of your assets, including cash, stock, machinery and other items. They will then settle any outstanding debts and pay your creditors any money they owe. Once both secured creditors and unsecured creditors have been paid, the remaining money can be distributed among shareholders.
For the process to begin, at least 75% of the company’s shareholders must agree to it. If fewer than this agree, then the company must use a different method.
How much does a members’ voluntary liquidation cost?
The exact cost of a members’ voluntary liquidation in the UK varies depending on the assets involved, the complexity of the case and the services required.
On average, directors can expect to pay around £3,000 plus VAT for the process to be completed successfully. More complex cases can cost more than this.
How long does a members’ voluntary liquidation take?
Getting organised can make the MVL process quicker. In most cases, directors can expect the process to take around 3 – 6 months to complete. There are some instances where the process will take longer.
Directors can speed the process up by ensuring that all documents are ready when requested, HMRC filings and payments are up to date, and all liabilities are taken care of.
What are the benefits of a members’ voluntary liquidation (MVL)?
There are many benefits of using a members’ voluntary liquidation if it is right for your company. You should conduct careful planning and consider the entire MVL process.
- It provides many tax benefits
- The process can be completed reasonably quickly
- It ensures that the company has been closed correctly
- The liquidator can deal with any creditor disputes and claims
- Shareholders can receive their distribution of remaining assets relatively quickly
Should I use the strike-off method or an MVL?
As a director, it can be confusing knowing which method to use. We always recommend that directors and shareholders seek professional advice before getting started with company closure.
As outlined above, an MVL is a more tax-efficient method for closing a solvent company.
Generally speaking, if, after paying off any debts to creditors, the company has assets or cash worth over £25,000, then a Members’ Voluntary Liquidation (MVL) is the best option. This means that shareholders do not need to take the money out as dividends, therefore not adding to their existing income tax. If your business does not meet this figure, then you should explore other methods of solvent liquidation. Read our blog on emotional support during business liquidation.
We hope this blog has been helpful regarding solvent liquidation advice. At 1st Business Rescue, our experts are equipped with the knowledge and skills to provide all insolvent solvent liquidation advice. Contact us today for professional, confidential advice.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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