What is the difference between insolvent liquidation and solvent liquidation?

Many people hear the word liquidation and automatically think it is a negative process for businesses that are in trouble. This blog post is going to explain how a liquidation process can be used in many different situations including for companies who are solvently trading and are looking to close down in order to receive tax benefits on shareholder reserves.

What is a Solvent Liquidation?

A Members’ Voluntary Liquidation (MVL) is a formal liquidation process which is used to close down the affairs of a solvent company. The term solvent means that a company’s assets must exceed their liabilities.

Since changes to the legislation occurred in 2012, in order for final distribution of funds over £25,000 to receive capital tax treatment then an MVL process will need to be used. This replaces the former HMRC concession known as ESC-C16.
The main benefit of using an MVL process is the possibility of receiving capital tax treatment known as Entrepreneurs’ Relief. If this relief is available to the funds then it can reduce the tax rate down to 10%.

The process is also deemed a huge benefit to the directors as it provides the chance to dissolve a company in the correct way and not leave any unattended issues behind.

What is an Insolvent Liquidation?

A Creditors’ Voluntary Liquidation (CVL) is a formal liquidation process used to close down the affairs of an insolvent company. The term insolvent means that a company cannot pay their creditors as and when the payments fall and their liabilities exceed their assets.

A CVL is a voluntary process initiated by the shareholders of the company. It is the process of closing down the insolvent company and selling its assets in order to pay back a pence in the £ distribution to its creditors. This process will require an Insolvency Practitioner to be appointed as liquidator in order to control the process accordingly.

An alternative insolvent liquidation process is called a Compulsory Liquidation. This process is usually initiated by a disgruntled creditor who is tired of waiting for their payments. This process is a court-led process which leaves little flexibility on any of the components of the process.

What does this all mean?

This article has highlighted where a liquidation process does not necessarily have to be used for insolvent companies. They can provide benefits for all limited companies depending on the situation that company is in at the time.
To understand more about how a liquidation process can help you and your limited company then call us today and speak to an Insolvency Practitioner.

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