Voluntary Liquidation Guide

What is voluntary liquidation?

Voluntary liquidation is a process where the directors of a company have identified that it has reached the end of its natural life, or that the company is insolvent.

Where the directors of a solvent company look to undertake a voluntary liquidation, this is known as a “Members Voluntary Liquidation”. Our guide to Members Voluntary Liquidations is located here – What is Solvent Liquidation?

The primary reason for utilising a MVL as opposed to moving a company to dissolution is that it may grant taxable benefits known as Business Asset Disposal Relief (BADR), commonly referred to by its former name of Entrepreneurs Relief. Our guide to BADR is located here – Business Asset Disposal Relief (BADR) or Entrepreneur’s Relief Advice

The majority of voluntary liquidations are undertaken where a company is insolvent and this is known as a Creditors’ Voluntary Liquidation (“CVL”). Our complete guide to CVL’s is located here – Complete Guide to Creditors Voluntary Liquidation (CVL)

Insolvency can be either on a “balance sheet” basis, where the company’s liabilities outweigh its assets, or on “cash flow” basis, where a company cannot pay its debts as and when they fall due. It is not uncommon for companies to be balance sheet insolvent but able to successfully trade, and it is usually when companies cannot pay some or all of their creditors that pressure begins to mount, thereby leading their directors to conclude they are “cash flow” insolvent.

Directors have a duty to act when they consider a company is or may be insolvent. Insolvency practitioners can advise directors on their options and the likelihood that the company is, or will become, insolvent. If a director chooses to do nothing to address unpaid liabilities, a creditor may force an insolvency procedure. If this results in the company being wound up, it may be that the directors are considered to have been trading whilst insolvent, which exposes the company the directors and any third parties with whom they have dealt to risks of various claims within the subsequent insolvency procedure.

CVLs are therefore a legal mechanism for directors to proactively formalise the company’s insolvency, comply with their fiduciary duties, and mitigate the risk of an antecedent transaction occurring which could later be challenged and potentially overturned.

What does it mean when a Company Goes into Voluntary Liquidation?

When a company enters into a CVL, it means that its directors have recognised that the company is insolvent, and that steps must be taken to preserve the position of the company’s creditors. Whilst normally directors act in the interest of shareholders, in an insolvent situation the interests of the company’s creditors take precedence.

This process results in a Liquidator taking control of the company and winding down its affairs, and realising any assets for the benefit of creditors.

When a company enters into a Members Voluntary Liquidation (MVL), the directors have concluded that it remains solvent, but that it has concluded its natural useful lifespan. This process is usually pursued to secure taxable advantages on the final dividends to shareholders under BADR.

As with a CVL, a Liquidator takes control of the company and winds down its affairs, although they now realise any assets for the benefit of shareholders, as all creditors should, or should within 12 months, be paid in full, in order for a MVL procedure to take place.

Why would you voluntarily liquidate a company?

As a director of an insolvent company, you have a duty to act when you realise that the company is insolvent. Whilst you should seek insolvency advice to ensure you are taking the correct course of action, one option that may be recommended is to liquidate the company.

If this is the best option for your company, by entering into CVL you are complying with your duties as a director. It is also important to note that many transactions can be challenged if they are deemed to take place whilst the company is trading whilst insolvent, and that you could become personally liable for these transactions.

It is therefore important you seek advice as soon as possible from a licensed insolvency practitioner to ensure that these risks are mitigated.

As a director of a solvent company, the primary advantage of a MVL is to facilitate shareholders in benefiting from BADR.

What are the pros and cons of voluntary liquidation?

In a solvent liquidation, an independent licenced insolvency practitioner is appointed as liquidator and has conduct of the wind down and conclusion of the Company’s affairs. This can therefore give surety to the directors and shareholders that the Company’s affairs are being wrapped up by a highly regulated professional, and provide peace of mind that all issues, such as the Company’s taxation affairs, are or will be resolved as part of the procedure.

Additionally, and likely of more value to directors and shareholders, is that an MVL can be used to facilitate shareholders receiving the benefits of BADR on their distributions received as part of the MVL process, and this is commonly the reason MVLs are utilised by directors to wrap up a Company’s affairs.

The main disadvantage to a solvent liquidation is that ultimately the liquidator will need to be remunerated for their work, and therefore this is an additional cost that will need to be met. In practice, particularly if adequate planning and preparation is undertaken, the costs of an MVL are usually modest, and the tax advantage to shareholders available under BADR usually far outweighs the liquidator’s costs.

In an insolvent liquidation, as with a solvent liquidation, the directors can have surety that a licensed insolvency practitioner is responsible for the wind down of the company’s affairs. This is particularly crucial in an insolvency scenario as liquidators are well versed in the commercial factors that need to be taken into consideration in an insolvency scenario, whereas a director may, through lack of relevant technical knowledge, fall foul of insolvency transactional restrictions, which can in turn have significant consequences for all stakeholders involved in the transaction.

By engaging and appointing an experienced insolvency practitioner, the directors can ensure their fiduciary responsibilities are being met, as a liquidator is inherently independent and ultimately acts for the benefit of creditors as a whole, as is required by the directors in an insolvency scenario.

The consequences of appointing a liquidator will vary based upon the facts of each engagement. If the directors have, intentionally or otherwise, entered into transactions which a liquidator can challenge, a liquidator will be obliged to obtain equivalent compensation or seek to overturn those transactions.

It is therefore imperative that directors provide full disclosure to the insolvency practitioner when seeking advice, as the insolvency practitioner should be able to explain the consequences, if any, of any transactions entered into. Furthermore, whilst the insolvency practitioner acts for the company, if they perceive that a claim may arise against the directors, such as for an overdrawn director’s loan account or personal guarantees, they will highlight this to the directors and recommend they seek independent insolvency advice.

How Long Does A Voluntary Liquidation Take?

A solvent liquidation is usually concluded within a year – indeed in order for an MVL to take place, the directors must consider all creditors can be repaid in full together with statutory interest within 12 months of the preparation of the Declaration of Solvency.

There are circumstances where this process can take longer. For example, the Company may be entitled to a refund of S455 Tax (a tax arising on overdrawn directors loan accounts) as an overdrawn directors loan account would be repaid as part of the MVL process. HMRC as a matter of policy will usually require a period of 18 months to elapse before refunding the S455 tax. In this scenario, the liquidator will usually have concluded the majority of their work and the liquidation will have to remain open, awaiting the receipt of the S455 refund, at which stage a final distribution can be declared and the matter closed.

Whilst some matters may arise following the commencement of the MVL that could not have been foreseen, normally the insolvency practitioner advising the company should be able to provide an indication of timescales for the whole process at or shortly following the initial advisory meeting.

As with a solvent liquidation, the majority of insolvent liquidations take around 12 months to conclude. This period usually affords the liquidator sufficient time to dispose of the company’s assets, agree creditor claims and make a distribution to creditors, conclude the company’s tax affairs and fill the necessary closure paperwork.

Liquidations predominantly run beyond 12 months where there is complexity with the assets. Examples to be considered here are claims that the liquidator may wish to litigate, which can run for a number of years depending on the defences raised and the availability of the Courts to hear the claim. This sort of claim may often be responsible for the company’s insolvency, and whereas the company was unable to fund pursuing the claim, liquidators are experienced in bringing claims in distressed scenarios, and have access to a number of funding providers who will meet the costs to litigate good claims.

Alternatively, if the company was in construction, it may be due to receive a number of retentions form customers, and the liquidation may have to remain open whilst the liquidators await the expiry of the retention period, as it is unusual for these debts to be repaid early.

What’s the Cost of Voluntary Liquidation?

In both a solvent and an insolvent liquidation, the costs of the liquidation are unique to the individual case, with insolvency practitioners firms usually having a minimum fee they will require to undertake the work.

Important points to note when considering the fee quote provided by the insolvency practitioner are as follows:

First informal advisory meetings are usually provided free of charge, unless there is a specific requirement for the nominated practitioner to consider extensive and complex paperwork in detail prior to the meeting;
Once the initial advisory discussions have taken place, the insolvency practitioner will be able to give an indication as to the fees that they will charge before undertaking further work;
At this stage, the directors will usually formally engage the insolvency practitioner and formalise the fees between all parties;
Fees are usually, in the first instance, drawn from the proceeds of the assets of the Company, and directors are usually only asked to guarantee an element of/any shortfall of the liquidator’s fees. Where there are sufficient assets, a guarantee may not be required;
Where a director is personally meeting the proceedings costs (for example the company has no assets) the insolvency practitioner may agree a repayment plan with the director prior to their appointment.

What can you expect from HMRC?

HMRC will generally liaise directly with the liquidator following their appointment in both a solvent and insolvent liquidation.

In an MVL, HMRC’s role will largely be to confirm whether all tax submissions are up to date, and report any that are outstanding to the liquidator, who in turn will ensure these submissions are made. Thereafter, HMRC will give clearance for the liquidation to close.

In an insolvent scenario, HMRC will confirm their claim to the liquidator, and will liaise with the liquidator regarding post liquidation tax returns, VAT returns and PAYE returns, which are paid / refunded as normal.

HMRC will usually not have any specific engagement with a liquidator, as the liquidator has a duty to investigate the Company’s affairs and report any conduct, including any issues regarding the Company’s historic treatment of HMRC, to the Insolvency Service, and as such they rely on the liquidator making such submissions.

Where HMRC wish to be directly involved in liquidation, it is usually for one of two primary reasons.

The first is that they have identified what they suspect to be some form of tax fraud. In this scenario they will seek to work with the liquidator to progress recoveries, but will also pursue recovery avenues available to them outside of the liquidation.

The second is the company has persistently failed to submit their tax, VAT or PAYE returns. Usually their primary concern in this circumstance is to establish if there is any consequential action they may bring arising from these submissions, and to quantify their claim within the liquidation.

If you are concerned about HMRC, you should raise this at the first meeting with the insolvency practitioner. They will be able to advise you, based on your disclosure, the likely manner in which HMRC will approach your scenario. If you have not engaged correctly with HMRC, whilst they have a prescriptive approach to resolving matters, they look considerably more favourably on directors who seek to pro-actively resolve the company’s affairs and propose a solution, and must also ultimately consider the commercial value of any offer made to them for the benefit of the Crown. It is, however, important to note that HMRC are not purely driven by commercial considerations, and where there is significant non-compliance they will disregard the commerciality of any offer as a matter of principle, and consider the compliance of the client keenly.

What are Directors’ Responsibilities?

The full duties and responsibilities of a Director is set out in Part 10 of the Companies Act 2006 (Companies Act 2006 (legislation.gov.uk)

However some core duties are as follows:

Directors must act within the powers granted to them under the terms of their employment and the Company’s memorandum and articles
They must promote the success of the company
They must exercise independent judgement
They should exercise reasonable care, skill and diligence in their activities
They should avoid conflicts of interest
They should not accept benefits from third parties and
They have a duty to declare an interest in proposed transactions or arrangements.
Can I Start a new Company after Liquidation?

Following a CVL you can start a new company, but you should be mindful of the provisions relating to Section 216 and 216 of the Insolvency Act 1986 regarding the use of the company’s name, or a substantially similar name.

If you trade in a similar fashion with a similar style, you may lose the limited liability granted to directors and become personally liable for your new company’s debts should it ever enter insolvency. There are steps you can take to avoid a S216 / S217 claim being brought against, and it is therefore important to seek advice if you intend to trade in this fashion to ensure you do not have claims subsequently brought against you personally.

In a MVL there are restrictions on the type of trade and, in particular, the sectors you can work in if the MVL has allowed you to qualify for BADR, and you should seek advice to ensure that a new company will not compromise your current or future BADR claims.

For further information and impartial advice, feel free to give us a call on 0113 242 0808 or e-mail advice@chamberlain-co.co.uk