What Is Solvent Liquidation & What Are The Benefits?

It’s common to hear of companies entering liquidation when they become insolvent and are no longer able to pay their liabilities. However, it’s less common to hear of solvent companies who aren’t struggling with debts to enter liquidation. What is solvent liquidation and why is it a beneficial option for some companies? Let’s start by looking at what’s involved in a solvent liquidation. 

What Is Solvent Liquidation?

Solvent liquidation is a process that’s used to wind up the affairs of a company that is still solvent i.e if their assets are greater than their liabilities. The process for winding up the affairs of a solvent company is a Member’s Voluntary Liquidation (MVL). This differs to a Creditor’s Voluntary Liquidation (CVL) which is used to wind up the affairs of a company that is insolvent.  A voluntary solvent liquidation, or MVL, is most commonly used by retiring business owners looking to close their company in a tax efficient way, or for businesses that have come to the end of their useful life. 

What Is The Process For An MVL?

The basic timeline for an MVL is as follows:

Appointment of a licensed insolvency practitioner: The first stage in an MVL is appointing a licensed insolvency practitioner who will be responsible for overseeing the liquidation and closure of the business.

Declaration of Solvency: In order for a solvent liquidation to go ahead, directors must sign a ‘Declaration of Solvency’. This confirms that the company has the means to pay its liabilities to creditors within a specified time period.

Resolution to wind up the company: Once the Declaration of Solvency has been confirmed, a resolution needs to be passed for the company to be wound up. This requires at least 75% of shareholders to vote in favour of the liquidation in order for it to go ahead. 

Notice is advertised in The Gazette: The next stage in the MVL process is to publicly advertise the company’s intention to close in The Gazette.

Sale of assets & distribution of funds: A crucial part of solvent liquidation that comes next is selling company assets. The funds that are raised are distributed to creditors and relevant parties in the following order:

• Secured Creditors (Fixed Charge)
• Preferential Creditors
• Secondary Preferential Creditors
• Secured Creditors (Floating Charge)
• Prescribed Part – Unsecured Creditors
• Unsecured Creditors
• Shareholders

Removal from Companies House: Once the liquidator has submitted the final documents, the company will be removed from the Companies House. At this point, the company will no longer cease to exist and the process is complete. 

Now that we’ve established the answer to the question ‘what is solvent liquidation’, you’re likely to be wondering how it can benefit solvent companies. Let’s find out.

What Is Solvent Liquidation Used For?

It can be advantageous to liquidate a solvent company for a variety of reasons. These include:

Extracting Funds In A Tax-Efficient Way

One of the main advantages of an MVL is that it is the most tax-efficient way to wind up the affairs of the company. This is due to the fact that funds can be extracted at a lower tax rate with the help of Business Asset Disposal Relief. Where possible, it’s always most tax-efficient to wind up the affairs of a company whilst it is still solvent.

Retirement

Solvent liquidation is also a suitable and popular option for business owners who are looking to retire and do not want their business to continue trading or do not have a viable succession plan. Using an MVL to close down a business ensures all affairs are wound up correctly so that the owners can focus on enjoying their retirement. They can also use the funds extracted from the liquidation to contribute towards their retirement plans.

The Business Has Reached The End Of Its Useful Life

There are many reasons that a business might close, and often it’s simply the case that the business has run its course. It may also be the case that directors are hoping to embark on an alternative business venture. In this instance, the best way to ensure all affairs are wound up correctly before moving on is to liquidate the company or close it via a voluntary strike off.

If you would like to hear more about the option of liquidating your own company, please don’t hesitate to get in touch with our experienced team at My Liquidation today.