A Members’ Voluntary Liquidation is a legal process to formally wind-up a solvent company’s affairs. The company’s solvency is defined by its ability to pay its debts in full together with interest within a period of twelve months, from the commencement of the winding-up.
The board of directors will consider the company’s financial position and propose to shareholders that it be placed into Members’ Voluntary Liquidation and a Liquidator is appointed. Shareholders then vote on the proposed resolutions.
In an MVL, the Liquidator’s function is to:
- realise the company’s assets for best value;
- discharge the costs of the liquidation;
- agree and settle creditor claims;
- distribute surplus funds and/or assets to shareholders.
As creditors will be paid in full, generally the Liquidator’s duty is to shareholders. Upon the liquidation ending, Companies House commence the dissolution process.
A Creditors’ Voluntary Liquidation is a legal process to formally wind-up an insolvent company’s affairs. The company’s insolvency is defined by either a cash flow or balance sheet test, as set out in the Insolvency Act 1986.
The board of directors will consider the company’s financial position and propose to shareholders that it be placed into liquidation. In addition, the company is required to provide creditors with an opportunity to either appoint the shareholders choice of Liquidator or nominate an alternative.
In a CVL, the Liquidator’s function is to:
- Realise company assets for best value;
- Carry out a statutory investigation regarding the conduct of the directors and report to the Insolvency Service’s Director Disqualification Unit;
- Identify and recover antecedent transactions;
- Discharge the costs of the insolvency process;
- Agree creditor claims and distribute surplus funds in accordance with the statutory order of priority;
- Where creditor claims are settled in full together with interest, distribute remaining funds to shareholders or members;
- Report to creditors and shareholders within 2 months of each anniversary on the progress of the case;
- Report to creditors and shareholders when the case is ready to be closed.
As creditors will not be paid in full, generally the Liquidator’s duty is to creditors.
Upon the liquidation ending, Companies House commence the dissolution process.
What does solvent liquidation mean?
The term ‘solvent liquidation’ refers to a legal process used for the purpose of winding-up a solvent company’s affairs. This process is called a Members’ Voluntary Liquidation.
What does insolvent liquidation mean?
The term ‘insolvent liquidation’ refers to a legal process used for the purpose of winding-up an insolvent company’s affairs. This process is called a Creditors’ Voluntary Liquidation.
What does it mean when a company is solvent?
In general terms, a company is solvent when its assets are sufficient to meet its liabilities. A company should also be able to meet its liabilities as and when they fall due. For the purposes of a Members’ Voluntary Liquidation, solvency is defined by the company’s ability to pay its debts in full together with interest within a period of twelve months, from the commencement of the winding-up. The company’s solvency is a requirement for it to be placed into Members’ Voluntary Liquidation.
What happens when a company is insolvent?
The Insolvency Act 1986 provides two tests for a company’s insolvency:
- Cash flow
- Balance sheet
If a company is unable to meet its liabilities as and when they fall due, then it is deemed cash flow insolvent.
The balance sheet test is when a company’s liabilities exceed its assets. Contingent and prospective liabilities should be taken into account.
For the purposes of seeking a winding-up order against a company, there are further tests which can be used:
- if a creditor (by assignment or otherwise) to whom the company is indebted in a sum exceeding £750 then due has served on the company, by leaving it at the company’s registered office, a written demand (in the prescribed form) requiring the company to pay the sum so due and the company has for 3 weeks thereafter neglected to pay the sum or to secure or compound for it to the reasonable satisfaction of the creditor, or
- if, in England and Wales, execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part, or
- if it is proved to the satisfaction of the court that the company is unable to pay its debts as they fall due.
Upon determining a company’s insolvency, a director has additional duties which he must comply with. Failure to do so could result in personal liability and prosecution. It is therefore essential that professional advice is obtained from a licensed Insolvency Practitioner immediately.
Obtaining independent professional advice early may help if you or your company are having financial problems. Having these discussions early may help to rescue the company or business.
It may be recommended that the company ceases to trade immediately as continuation of trade at this stage would need to be in the interests of creditors.
Various options will be available so it is fundamental that these be explored fully before any future strategy is agreed.
How do I qualify for insolvency?
To qualify for insolvency, a company needs to demonstrate that it meets one of the tests prescribed by the Insolvency Act 1986. These tests are:
- Liabilities, including contingent and prospective, exceed assets;
- Inability to meet debts as and when they fall due.
How do I know if my company is insolvent?
If your company fails any one of the two tests set out in the Insolvency Act 1986, then it is likely to be insolvent. In addition, the company also needs to consider whether it could be subject to a winding-up petition being presented to court. This is because there are additional tests to prove a company’s insolvency.
Due to the serious nature of a company’s insolvency, it is essential that professional advice is obtained from a licensed Insolvency Practitioner immediately. An IP will consider the company’s position, explore the options available and recommend to the board of directors the most appropriate option to achieve the best outcome for creditors.
Whether you are considering a solvent or insolvent liquidation, it is highly recommended that professional advice be obtained from a licensed Insolvency Practitioner at the earliest stage.
The law and best practice guidance in this area is complex and failure to comply with additional obligations can bring personal liability and potential prosecution to company directors. The interests of creditors are fundamental when a company is insolvent and their position should not be prejudiced.
Many IPs offer a free initial consultation and Approved Recovery are no different. Approved Recovery specialises in providing Members’ Voluntary Liquidations to small companies nationwide.
We service trading, contractor, consultant and dormant companies. We also have experience in dealing with special purpose vehicles and corporate group simplification. We offer a simple Members’ Voluntary Liquidation service called Solvent Solutions.
Contact us for a free no obligation consultation.