Many people assume that Company Liquidation is only for insolvent businesses, however, this is not always the case.
Liquidation is a process which can apply to solvent companies too, especially for smaller businesses or businesses which have passed their means.
Can you liquidate a solvent company?
Yes, you can liquidate a solvent company. Sometimes a director of a solvent company may decide to close the company for personal reasons, such as retirement, the market changing or other reasons.
In circumstances as such, liquidating the business may be the appropriate solution.
What does it mean when a company is solvent?
When a company is solvent, it means its assets are sufficient to meet its liabilities when they fall due.
This basically means that the value of the company’s assets are higher than the total of its debt obligations.
What is Solvent Liquidation?
The term solvent liquidation refers to a legal process which is used for the purposes of winding-up a solvent company’s affairs.
How is insolvent liquidation different from solvent liquidation?
Solvent liquidation is down to the directors of a company choosing to close the business for personal reasons, regardless of the fact that the company’s assets are higher than its debt obligations.
Insolvent liquidation, however, is when a company is unable to meet its liabilities when they fall due, or that the company’s debt exceeds its assets. Insolvent liquidations are not usually voluntary, unlike solvent liquidation.
Both types of liquidation require a liquidator to be appointed to release assets, settle costs and make distributions to shareholders and creditors.
When is solvent liquidation applicable?
Solvent liquidation is applicable to any company which has more assets than its liabilities and has either reached the end of its life, or the director has decided to wind the business up for personal reasons.
The company must be free of any contractual agreements which require it to remain on the Companies House register or prohibit it from moving to dissolution.
What happens in a solvent liquidation?
Once a director has decided that they wish to liquidate their solvent company, it must be voted upon by shareholders. This will then be followed by a liquidator taking care of the rest of the process.
Companies can choose to enter a Members Voluntary Liquidation (MVL) which is used to wind up a solvent limited company.
During this process, the appointed insolvency practitioner will settle outstanding debts, legal disputes and pay any creditors through the sale of assets. The remaining funds are then distributed to shareholders.
MVLs allow companies to be closed down properly, providing all the appropriate criteria for HMRC is met.
If you wish to close it in a different way you can “strike it off” the register of companies, and therefore dissolve the company. However, there are a few requirements that your business must meet. These include:
- Your business can’t have traded or sold off any stock in the last three months;
- It can’t be at threat of liquidation;
- Your business can’t have changed names in the last three months;
- There can be no agreements in place with creditors.
It’s worth remembering that you are obligated to inform HMRC before striking off your company. If your company still has employees on the books, it is a legal requirement to inform them to carry out any relevant redundancy processes.
How long does a solvent liquidation take?
Assuming all liabilities have been settled prior to the appointment of an insolvency practitioner, distribution of company assets can take place as soon as 21 days.
The estimate for the dissolution of a company is uncertain, as it is all dependent on HMRC clearance.
As a general guide, we estimate around 3 months from appointment, but it can take longer.
Solvent vs insolvent liquidation
With insolvent liquidations, the priority is to protect the interest of the creditors whereas with solvent liquidation, although creditors must be paid first, shareholders then become a priority.
The process, costs and timings associated with solvent liquidations is completely different from insolvent liquidations.
This can be due to the fact that insolvent liquidations of limited companies can trigger personal liabilities for the directors and/or shareholders if personal guarantees have been given, or where the directors have acted unlawfully.
Advantages of solvent liquidation
The main advantages of solvent liquidation are as follows:
- Solvent liquidation can minimise tax payable by shareholders on the final distributions they receive from the funds held by the solvent company.
- They can also provide reassurance to directors and shareholders that all matters have been reviewed and concluded by an independent third party. This mitigates the risk of any future claims arising against the company and its directors.
For example, there are steps taken to confirm no creditor has a claim against the company.
Disadvantages of solvent liquidation
The main disadvantages of solvent liquidation are as follows:
- Many directors use solvent liquidation to gain tax advantages on the final distribution to shareholders, such as through Entrepreneurs Relief. However, there are some restrictions on qualifying for this.
A director may not establish a company in the same sector within two years of the liquidation of the solvent company, therefore they would not qualify for Entrepreneurs Relief.
- Another issue is that processes, such as an MVL, do come with greater upfront fees to pay than a simple dissolution. It’s also worth noting that dissolution does not have the same tax benefits as an MVL.
If your company is solvent, but for personal or business reasons you wish to liquidate the business, get in touch with us today at The Insolvency Experts.
We will take the time to understand your specific needs and requirements, whilst providing the best advice suited for your case. Contact us our financial experts today to see how we can help you.