Published: 04/07/2022 By Hannah McCormackIt's a common misconception that a company in liquidation must be insolvent, however, there are 2 paths a company that is going into liquidation will usually follow – either an MVL or a CVL.
The difference being an MVL (Members' Voluntary Liquidation) is used by a solvent company and a CVL (Creditors' Voluntary Liquidation) is used by an insolvent company but both are very different from insolvency.
To make it easier to understand the difference between the 3, we have set out some bullet points below:
- The company prepares a declaration of solvency to confirm that it is able to pay all of its debts in full
- The company voluntarily decides to wind up its affairs – usually because the business is no longer required or its directors wish to retire
- An MVL can be used as a means of resolving a shareholder dispute
- The company can be dissolved fairly quickly (usually within 3 months)
- Once the company is wound-up, funds are distributed to shareholders in a tax-efficient manner
- The Liquidator can return funds to directors and shareholders as capital
- It will be clear to the public that the company chose to wind-up for reasons other than insolvency
- The company is unable to pay its debts. However the CVL process will enable it to use its assets to pay off these debts at a later date
- The company voluntarily decided to wind up it affairs in order to pay its debts as far as it can
- A CVL protects the company from further legal action. It can also protect any personal liability of the directors
- The process is fast and the company can be placed into CVL in approximately 2 weeks
- All assets, and possibly the business, are sold to pay creditors
- Employees can claim unpaid wages and redundancy pay from the Government, however, there is usually a no real return for shareholders
- Once wound-up, the process will be seen by the public as a company choice and not a hostile credit action
- The company is unable to pay its debts as the value of it liabilities outweighs the value of assets
- The company must act fast to consider its options, otherwise it could be forced into compulsory liquidation
- If the company does not act, directors could be at risk of facing legal action. Directors could also be found personally liable for debts.
- The insolvent company will need to go into Administration or liquidation unless it enters a Company Voluntary Arrangement (CVA) or explores other options ASAP
- Creditors may chase the company for a long time, or petition the Courts for the company’s liquidation. This can be stressful unless fast action is taken.
- Valued employees are most likely to disperse and seek employment elsewhere.
- News of a business entering compulsory liquidation will be viewed as a hostile creditor action by the public and the media
Whatever your situation we advise seeking professional advice as soon as possible; you may not realise but there could be many different implications if things are left to get out of control! We offer an initial free chat, we can talk through all the options available to you to put your mind at rest. Call us today on 020 8661 7878 or email email@example.com