What is Solvent Liquidation?
A solvent liquidation is a process used to conclude the affairs of a company that has reached the end of its natural life.
A solvent liquidation is often recommended to directors by their tax advisors as it can provide a tax efficient vehicle through which the company’s affairs are concluded and final shareholder distributions are made.
A director looking to place a company into solvent liquidation will have to provide a sworn Declaration of Solvency confirming that the company has sufficient assets available to repay all outstanding debts within a 12-month period from the company entering into liquidation.
The company’s debts do not need to be paid in full prior to the liquidation commencing as the liquidator is able to make these payments.
The company’s assets do not need to have been disposed of and held as cash. The liquidator can arrange for the sale and disposal of the company’s assets as part of the liquidation process. Alternatively, the liquidator can undertake a distribution in specie where the assets are transferred directly to the shareholder(s).
How long does a solvent liquidation take?
The timeline of a solvent liquidation will be entirely dependent on a company’s affairs, but usually the whole process is concluded within one year.
For example, where the liquidation is a distribution only process (i.e., all assets have been sold and are held as cash and the company has no creditors) shareholder distributions can, if required, be made within hours of the company entering into liquidation.
If assets need to be sold and creditors’ claims agreed and paid, these steps may take several months to conclude – for example if a property sale is being undertaken, the usual conveyancing steps will need to be taken.
An important part of the liquidation process is confirming with HM Revenue & Customs (“HMRC”) that the Company’s tax affairs are fully up to date and that HMRC have given clearance to the liquidator that there are no outstanding tax matters. This is usually the lengthiest part of the process as whilst clearance can be sought as early as the weeks following appointment, and it can take HMRC anywhere between 3 to 9 months to review the Company’s file and confirm that clearance has been granted.
What is the solvent liquidation process?
An insolvency practitioner will work with the directors to understand the company’s affairs and current position, to ensure any issues that require resolution are attended to prior to the commencement of the solvent liquidation.
Where no matters require resolution the company can enter solvent liquidation in a matter of days, and the necessary meetings are arranged at time convenient to the shareholders.
A series of meetings need to be held with the shareholders. The timeline for these meetings will be influenced by the number of shareholders, the company’s Articles of Association and current legislation. For owner-manager companies these meetings can be held on the same day on a back-to-back basis, moving from each meeting straight into the next meeting.
Where further notice is required, it can take several weeks to formally enter liquidation. The proposed liquidator will review the required timeline and communicate this to the directors at the point of engagement.
At these meetings the directors and members agree that the company is solvent, agree the Declaration of Solvency detailing that the company is solvent, and pass the resolutions to appoint the liquidator.
Thereafter, the liquidator will assume control of the company and deal with the conclusion of its affairs.
When is solvent liquidation applicable?
A solvent liquidation is applicable to companies who have more assets than liabilities and has reached the end of its useful life and is no longer needed.
The company must also be free of any contractual or similar obligations that compel it to remain on the Companies House register and / or prohibit it from moving to dissolution.
What does it mean a company is solvent?
Most companies are solvent, and a solvent company is a company which does not fail the two formal tests of insolvency.
The first test is whether the company can pay its debts as and when they fall due. This is often referred to as cash flow insolvency. Most companies that enter insolvency fail this test.
The second test is whether the company has more assets on its balance sheet than liabilities. Notably, many companies are balance sheet insolvent, but do not need to enter or consider a formal insolvency process and are able to continue trading as they are able to maintain payments to their creditors as and when they fall due and are therefore not insolvent on a cash flow basis.
Solvent vs insolvent liquidation
A solvent and insolvent liquidation are different processes that are effectively utilised in opposing circumstances.
Whilst they share some similarities, in that a liquidator is appointed and he/she has similar powers to realise assets, settle the costs and expenses of the process and make distributions (subject to the approval of the relevant stakeholder) they are to achieve different ends.
A creditor must be paid in full in a solvent liquidation and shareholders would expect a distribution to be paid from residual funds. In an insolvent liquidation it highly unlikely any dividend will be paid to the shareholders, and creditors are likely to only receive a pence in the £ payment, if any, following the realisation of the company’s assets.
How do I know if my company is solvent?
If your company has more assets than liabilities, it is likely to be solvent. Whilst it may be obvious that this is the case – for example you may have significant cash reserves and have settled all of your credit accounts and settled all your employee liabilities – it may require some scrutiny if you have limited cash reserves and you have not settled your credit accounts / made payment to your employees for redundancy and similar claims.
You will also have to consider if the company has given any warranties or guarantees that could potentially result in a claim in the future. This would also include claims that may be being brought through the Courts, but have not yet been adjudicated on. Such a process would require resolution prior to a solvent liquidation being commenced.
How Do You Close Down a Solvent Company?
It is the responsibility of the liquidator to close a solvent company going through a solvent liquidation. Once they have completed all the work required in statute, the liquidator will look to move the company to dissolution which will conclude its affairs.
To enter solvent liquidation, meetings of directors and shareholders must be held to confirm the company’s solvency, appoint the liquidator, and provide the liquidator(s) with the necessary authorities to discharge their duties.
As an alternative to a solvent liquidation, a director may explore the dissolution of the company through a process known as striking off guidance on this process be obtained at the gov.uk website: Strike off your limited company from the Companies Register – GOV.UK (www.gov.uk).
Insolvent Liquidation definitions
A company is legally insolvent if it cannot pay its debts as and when they fall due, and if it has less assets on its balance sheet than it has liabilities.
If a creditor is undertaking insolvency action, the test usually applied is if the creditors cannot be paid as and when they fall due, as many companies trade successfully whilst balance sheet insolvent.
An insolvent liquidation is a liquidation where either the directors or the Courts have concluded that the company is unable to pay its creditors as and when these debts fall due.
Normally the directors will have been unable to agree deferred payment terms and will have concluded that the company has no prospect of paying creditors in the future, or creditors will have commenced recovery proceedings through the Court for unpaid debts, resulting in a winding up petition being served upon the company.
When considering if a company is insolvent, a director will also need to consider all of the company’s liabilities, including liabilities that may not have arisen, but would become payable if the company ceased trading – such as employee claims that would arise on redundancy. These contingent claims must be considered prior to concluding if a solvent liquidation can be undertaken.
When Closing a Solvent Company, Should I Use an MVL Process Or Dissolution?
A solvent liquidation provides surety to the directors and shareholders that an independent professional has undertaken a formal managed shut down of the company’s affairs and concluded all outstanding matters.
This will grant comfort to the directors and shareholders that it is unlikely that any further action will be required by them once the company moves to dissolution.
In particular, the liquidator will seek to agree that the company’s tax affairs are concluded to the satisfaction of HM Revenue & Customs. As such, it is highly unlikely HM Revenue & Customs will seek to restore the dissolved company to the register after a satisfactory solvent liquidation has been concluded.
Additionally, the company’s shareholders may benefit from tax advantages, such as Entrepreneurs Relief, which is not available where companies have moved straight to dissolution.
Where a company has no liabilities and is unlikely to benefit from Entrepreneurs Relief or other similar tax advantages, it may be more efficient to move the company straight to dissolution as the company may be unable to meet the costs of appointing a liquidator and therefore a solvent liquidation would not provide a tangible benefit.
It is important to note in the current climate following the introduction of Bounce Back Loans that HM Revenue & Customs will be scrutinising companies that had the benefit of loan and moved to dissolution without going through a formal liquidation process and will be considering restoring these companies to the register in due course should they consider there are matters which require further investigation.
Advantages of solvent liquidation
Solvent liquidation can minimise tax payable by shareholders on the final distributions they receive from the funds held by the company.
They can also provide directors and shareholders surety that all matters have been reviewed and concluded by an independent third party, thereby mitigating the risk of future claims arising against the company and / or its directors. For example, as part of the liquidation process, steps are taken to confirm no creditor has a claim against the company, and as such no further claim can be made without the leave of the court.
Disadvantages of solvent liquidation
Many directors utilise a solvent liquidation to gain tax advantages on the final distribution to shareholders, such as through Entrepreneurs Relief.
There are some restrictions on qualifying for Entrepreneurs Relief. For example, a director may not establish a company in the same sector within two years of the liquidation of the solvent company.
Furthermore, there is a lifetime cap of £1 million on distributions which may attract Entrepreneurs Relief. It is therefore important to ensure that the shareholders are eligible for the tax benefits as a dissolution process may be more cost effective if the shareholders are not entitled to Entrepreneurs Relief.
How can Chamberlain & Co help?
The company will need to instruct an insolvency practitioner such as Chamberlain & Co to advise the directors on the most appropriate course of action. If liquidation is the chosen option a licensed insolvency practitioner from Chamberlain & Co can be appointed as the liquidator. Get in touch