Solvent liquidation meaning vs insolvent liquidation

What’s the difference between solvent and insolvent liquidation? 

To look at solvent liquidation vs insolvent liquidation, we first need to look at a commonly asked question: ‘What’s the difference between solvent and insolvent liquidation?’ 

The main difference between solvent and insolvent liquidation is that each is used in a different circumstance, depending on the financial status of your company. 

Solvent liquidation is the liquidation of a company that is solvent. Which means that it can pay its debts on time and in full. There might also be profits inside the company. If this applies to your company, it can be liquidated through a formal process called a Members’ Voluntary Liquidation (MVL).  

Insolvent liquidation is the liquidation of a company that is insolvent. Which means that it can’t pay its debts on time and in full, now or in the future. While it might have assets like stock or premises, it needs to liquidate these to turn them into cash to be able to afford to pay its debts. This can be done using a Creditors’ Voluntary Liquidation (CVL).  

Beyond this, the difference between solvent and insolvent liquidation lies in the practical steps taken by the licensed insolvency practitioner closing the business.  

Solvent liquidation vs insolvent liquidation. Members’ Voluntary Liquidation (MVL) 

An MVL is generally used by a business owner or company director who: 

• is a contractor taking a full-time employment.  
• is retiring and wishes to close the company rather than pass it on. 
• has a dormant company that no longer serves a purpose.  

In all of these situations, if there’s significant profits in your business, an MVL means you can take advantage of tax breaks to get the most of your hard-earned profits from the company when it closes.  

An MVL is also a simple way to tie-up any loose ends, such as paying creditors and paperwork, because your licensed insolvency practitioner will take care of this legwork for you.  

The MVL process 

1. You, and any other company directors, need to make a statutory declaration that your company is solvent. This involves preparing a closing financial statement, which has to be signed in the presence of a solicitor or notary. 

2. Within five weeks of making this declaration, you need to call a meeting of the company’s shareholders. The purpose is to get their agreement to place the company into liquidation. You might also agree on which liquidator to appoint at this meeting.   

3. Your liquidator (who has to be a licensed insolvency practitioner) will take charge of your company and start the MVL process, firstly sending a notice of your planned liquidation to The Gazette. 

4. After getting the company’s assets valued, your liquidator arranges for their sale, settling any outstanding debts and paying shareholders from the proceeds.  

5. The final job of your liquidator is to apply to Companies House for your company to be ‘struck off’ its register. 

Solvent liquidation vs insolvent liquidation. Creditors’ Voluntary Liquidation (CVL) 

A CVL is the most common way to close an insolvent company in the UK. According to R3, the UK trade association for the insolvency and restructuring professionals, 55% of businesses closing due to insolvency do so using a CVL.  

Company owners and directors choose this process for a number of reasons: 

• Any threatened legal action by your creditors stops once the CVL process starts, because they will be paid back via the CVL instead.  
• Your employees can claim outstanding wages, notice, holiday pay and redundancy from the government if your company is going through a CVL.  
• The licensed insolvency practitioner acting as liquidator becomes the main point of contact for the company, so you no longer need to communicate with your creditors directly. 
• All the admin is taken care of by your liquidator, which reduces the stress on you and gives you the peace of mind that everything will be done properly.  

The CVL process 

1. The first step is to call a shareholders’ meeting, so that you and the other company directors can get their agreement for the liquidation. You need at least 75% of them to vote in favour of it for the liquidation to go ahead. 

2. You can now appoint a liquidator, who must be a licensed insolvency practitioner. It’s their role to take charge of your company. 

3. Within 15 days of the shareholders’ meeting, your liquidator will send a winding-up resolution to Companies House.  

4. As part of the CVL process, your liquidator must investigate the reasons for the company’s insolvency. If they find that the actions of one or more company directors caused the insolvency, they have a legal obligation to submit their findings. Successful prosecution could mean a fine, director’s disqualification or even a prison sentence.  

5. Your liquidator gets the company’s assets valued and sold, settling any outstanding debts with the resulting funds.  

6. The liquidator then sends in a notice of your company’s liquidation to The Gazette. 

How can Liquidation.co.uk help you understand whether solvent liquidation vs insolvent liquidation is right for you? 

We can help you understand the difference between solvent and insolvent liquidation and talk you through your options. It’s important to remember that a company can sometimes be saved from liquidation, or a business saved and restarted under a new company.  

As industry leading experts with 40 years’ experience, we’re in the best position to advise you of the most appropriate option for your business. We can also match any like-for-like quote ensuring you receive the best service for the lowest price. 

Solvent liquidation vs insolvent liquidation

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