When a company is liquidated, it ceases to trade, all of its debts are crystallised, and any assets are realised/sold to repay the debts of the company. Responsibility passes to the appointed liquidator who take the company through the statutory steps to close and eventually remove the company from the register at Companies House.
Liquidation options for a company in Scotland
This type of liquidation is typically used where the business has served its purpose – the owner is retiring and shareholders want to remove their money from the company. There are currently attractive tax incentives to use this closure method. A company is deemed to be solvent when it has enough assets/funds to pay off all creditors within 12 months, and a formal process is required (liquidation) if the company has more than £25,000 of assets to distribute
- If 75% of the shareholders agree then a solvent company can use the MVL process to release the remaining funds to the shareholders once all the creditors have been paid. The process must be managed by a licenced Insolvency Practitioner (IP) and is often used after directorship changes, company restructuring or simply when the company is no longer required. If shareholders are owed more than £25,000 an MVL can also be the most tax efficient option by claiming Entrepreneurs Relief .
What are the advantages of a Members Voluntary Liquidation (MVL)?
- Favorable tax rates – shareholder payments are taxed as capital gains rather than Income Tax or dividends resulting in lower tax rates.
- Business Asset Disposal Relief (Entrepreneurs Relief) – you may be eligible for this relief which would grant you a further reduction on capital gains tax down to 10% – after you have used your allowance of £12,400.
- Quick access to funds – receive an advance payment on funds using a Deed of Indemnity with a final payment being made on conclusion of the process (90% of free funds paid within weeks).
- A licenced Insolvency Practitioner is used – this guarantees professional advice and guidance throughout the whole process.
- They are fully insured and personally responsible for any assets/funds in the company – your money is safe and insured throughout the process
- Minimal involvement by you – your IP will take over all communication with third parties including HMRC, Companies House, Edinburgh Gazette, Accountant in Bankruptcy and Creditors.
- Allows shareholders to extract cash or assets – the MVL process is quick and easy. Shareholders can extract company value in assets or cash.
A company is deemed to be insolvent when its liabilities: ‘creditors’, exceed its assets, or when it is unable to pay a debt as it falls due: ‘cashflow’ insolvent.
There are two routes into this type of liquidation: voluntary – where the shareholders agree to liquidate, or compulsory – where the directors or a creditor seeks the courts help to liquidate a company.
- If the company is insolvent and 75% of the shareholders agree that there is no future for the company, then this route can be used into liquidation. A licensed Insolvency Practitioner (IP) will take control of the business and sell the company assets, pay creditors and finalise all company matters so as to close the business.
- Any outstanding company debts will be crystallised and written off. The only exception here is if the company has loans secured by you personally. These would still require to be paid through a personal guarantee.
- The CVL route is by far the most common route into liquidation for small / medium sized companies, it usually requires no consent and is a paper exercise.
- Compulsory liquidation is the where a court has appointed a liquidator (proposed by the petitioning party) following a petition being presented to wind the company up.
- A petition is presented showing that the company has failed to pay its debts and is therefore cashflow insolvent and should be wound up.
- This is the route most often used by creditors, by way of submitting a winding up petition into the local Sheriff Court following non payment of debts. Any debt pursuits by creditors normally follow this path and its the way HMRC would liquidate the company if not paid.
- If you have received a winding up notice and your creditors are now forcing your company into liquidation then you must act quickly. Once the winding up petition is advertised then your bank will freeze your company accounts and you will need to pay the debt in full to be released from the position.
What are the advantages and disadvantages of company liquidation?
- You get closure on the overall position knowing that the old company is being dealt with properly and you are doing the right thing.
- Most debts are written off (with some exceptions).
- You are free to start another business immediately – and this could be part/all of the old trade
- The process is almost instant if the voluntary route is chosen giving immediate relief from the position
- An Insolvency Practitioner (IP) takes over your old company and handles administration – removing the responsibility of dealing with all matters.
- The IP handles all communication with creditors from Day 1.
- Debts stop accumulating and creditor pressure/calls/letters cease.
- Provides an exit from all your property leases and long term liabilities such as equipment rental so you are released from them (some exceptions around agreements that are personally guaranteed).
- Takes care of staff redundancies, contracts and sells off all assets.
- Personal liability for some debt if you gave a personal guarantee.
- To continue trading the business, you will need to form a new company and buy any assets from the old company – this is legal provided you pay a fair value – we can guide you on this route.
- Director conduct is reviewed as part of the process and depending on your actions as a director, this may lead to either some money being owed back to the company or a review by the government
- Companies house will show that you were a director of a company that was insolvent – but this has no impact on your personal credit rating
- If there is a director’s loan account – that is, you owe the company money, you could be asked to repay this.
Can I be a director of a company after liquidation?
The short answer is yes!
You can set up a new limited company with a different name. When a company goes through liquidation an investigation is carried out by the Insolvency Practitioner into how you as a director acted. As long as you have acted legally and in the best interest of the company, you have nothing to be concerned about.
The investigation is there to ensure that you did not act in a manner that could be classed as either wrongful or fraudulent trading. The easiest way to avoid this is simply to act quickly when you realise your company is in financial difficulty.
Who gets paid first when a company goes into Administration in Scotland?
The payouts are made according to the Insolvency Act (1986) which lists creditors in the following order;
- Secured creditors with a fixed charge & Insolvency fees
- Preferential creditors
- Secured creditors with a floating charge
- Unsecured creditors
Are insolvency procedures different in Scotland and England?
Yes, there are differences between insolvency procedures in Scotland and England and it’s important that you get the information that is right for you. Much of the information available online focuses on England. We ensure our information is relevant to Scotland and Scottish company directors. We will ensure you receive access to a licenced Insolvency Practitioner who has local knowledge.