How To Prepare Your Business For Voluntary Liquidation

While liquidation is often thought of as a compulsory final straw initiated by HMRC in response to business financial difficulties, the reality is that most liquidations in the UK are conducted on a voluntary basis. Voluntary liquidation gives both solvent and insolvent companies the ability to wind up in consideration of creditor and/or shareholder interests, but it’s not a process that can be activated on a whim. Proper preparation is required to ensure the voluntary liquidation process goes smoothly – and guarantee that all legal requirements are met. 

What Is Voluntary Liquidation?

Simply put, voluntary liquidation is the formal process of ceasing company operations, selling assets and dissolving. It can take two forms, depending on the motive behind embarking on the process and whether the company being liquidated is solvent or insolvent.

• Creditors Voluntary Liquidation (CVL) is the process initiated when a company is insolvent and can no longer meet its financial obligations. It involves appointing a licensed insolvency practitioner, who will oversee the formalities and ensure that all assets are sold and creditors are paid as fairly as possible, before winding up the company. 
• Members Voluntary Liquidation (MVL) is the kind of liquidation utilised by solvent companies, typically in cases where business owners are retiring or the company has fulfilled its purpose. During an MVL, an insolvency practitioner distributes funds and assets to shareholders, before removing the company from the Companies House Register.

Why Is It Important To Prepare For The Liquidation Process?

Both types of voluntary liquidation require the involvement of a licensed insolvency practitioner to oversee the process and ensure compliance with the Insolvency Act 1986. It is therefore critical that company directors are adequately prepared for the steps that lie ahead. Specific legal and financial processes will be followed carefully by the insolvency practitioner, and failure to adequately comply with these steps can result in significant delays and even financial penalties. A well-prepared approach to voluntary liquidation also ensures that your stakeholders are informed and treated fairly and, in many cases, can help to maximise the value of your assets and ensure the best outcomes for creditors and shareholders.

Steps To Prepare For Voluntary Liquidation

Whether your company is solvent or insolvent, you can expect to work through the same overarching steps to best prepare for the process ahead. 

• Understand Your Financial Position

Before embarking on either kind of voluntary liquidation, you should always begin by conducting a thorough financial review of your business. This will ensure that you have a correct understanding of the solvency of your company, and therefore know which type of liquidation is the most appropriate. While you may think you are confident that the business is solvent and that you can enter the MVL process, this kind of in-depth financial analysis may identify debts you were not aware of which could change your approach moving forward. It’s important to be equipped with the key financial information before making any next steps. 

• Get Your Accounts In Order

Accurate financial records are vital in any voluntary liquidation process so make sure that they are up-to-date and prepared ahead of time. These documents will be closely scrutinised during the liquidation process, particularly during a CVL where creditors have a vested interest in the company’s remaining assets. Your financial records will also be examined to ensure that no director misconduct has taken place. If anything is missing, you could face delays or even financial penalties. 

• Engage With An Insolvency Practitioner

A licensed insolvency practitioner is required to oversee both types of voluntary liquidation processes, and engaging with them early can be key to things unfolding smoothly. As well as carrying out the liquidation itself, an insolvency practitioner can provide you with transparent liquidation advice ahead of time to ensure that you have taken into account all of the key considerations relevant to your business.

• Meet With The Board Of Directors

When you are confident you would like to go ahead with voluntary liquidation, you must hold a board meeting to formalise the decision. For both CVLs and MVLs, shareholders must agree to liquidate the company and this typically requires a special resolution passed with a 75% majority vote. In the case of an MVL, a Declaration of Solvency must also be signed, confirming the company can pay its debts within 12 months. 

• Understand Creditor Hierarchy

It’s also essential that you understand how creditors will be prioritised during asset distribution. In a CVL, secured creditors are paid first, followed by preferential creditors, unsecured creditors, and finally shareholders. By making sure that you are aware of this hierarchy, you can better manage expectations and ensure compliance with rules as per the order of creditors. 

Begin The Voluntary Liquidation Process

Through careful preparation, your company will be primed and ready for the formal liquidation process to begin. This will be carried out by your chosen insolvency practitioner and includes selling company assets, paying creditors as per the order you have taken time to understand and filing the necessary documents with Companies House to dissolve the business. 

The time this process takes will vary between businesses, but preparing properly should give you confidence that any bumps in the road will be minor. The key to ensuring a stress-free and efficient process is always to work closely with the insolvency practitioner, providing the right information when required. 

At My Liquidation, we specialise in guiding businesses through both types of voluntary liquidation, offering advice both prior to these processes commencing and acting as the insolvency practitioner through the formalities. If you need any guidance when it comes to a CVL or MVL, or wish to enlist our services to help you prepare properly, do not hesitate to get in touch.