Company Liquidation Alternatives

When a business faces financial problems, directors often think liquidation is the only way forward. While liquidation is sometimes necessary, there are alternatives that may provide better outcomes. Some options allow you to close a limited company in a simple way, while others focus on helping insolvent companies continue to trade or restructure. Knowing these options can reduce the risk for directors and give creditors a fairer result.

Are You Solvent or Insolvent?

The first step is to understand the financial position of your business.

• A company is solvent if it can pay its debts on time and has more assets than liabilities.
• A business is insolvent if it cannot meet its debts or its liabilities outweigh its assets.

This distinction matters. If the business is insolvent, company directors must act in the best interests of creditors. Failing to do so could result in legal action or personal consequences.

Options for Solvent Companies

If a company is solvent but no longer needed, there are two main choices.

Members’ Voluntary Liquidation (MVL)

An MVL is a formal liquidation that allows a solvent company to close in a structured way. Directors make a declaration of solvency and appoint a licensed insolvency practitioner to act as liquidator. At least 75 per cent of shareholders must agree before the process can begin.

An MVL reduces the risk of future claims, as the liquidator deals with all liabilities. It can also provide tax benefits. Distributions to shareholders are treated under capital gains tax, which is often more efficient than income tax. Business Asset Disposal Relief may apply in some cases.

Company Dissolution or Strike-Off

Company dissolution is a quicker and cheaper way to close a limited company. Directors apply to the register at Companies House using form DS01. The company must have stopped trading for at least three months and have no outstanding debts.

This option avoids the cost of appointing a licensed insolvency practitioner, but it carries risks. If any assets are left, they pass to the Crown under the rule of bona vacantia. Creditors can also object. Dissolution is only suitable for simple solvent companies with little or no remaining assets.

Choosing Between MVL and Dissolution

MVL is safer for companies with assets above £25,000 or where there may be unknown liabilities. Dissolution is better for small and straightforward cases.

Options for Insolvent Companies

If the business is insolvent, acting quickly is essential. Several alternatives to liquidation may help save the business, though liquidation may still be necessary in some cases.

Company Voluntary Arrangement (CVA)

A company voluntary arrangement is a formal agreement with creditors. The company proposes a repayment plan, often lasting three to five years. At least 75 per cent of creditors by value must approve it.

A CVA allows the business to continue trading while paying off debts. Interest and charges are frozen, and creditors cannot take legal action as long as payments are made. However, this option is only viable if the business can show it is capable of recovery.

Administration

Administration involves handing control of the company to an administrator. The administrator aims to rescue the business, achieve a better result for creditors than liquidation, or sell assets to repay debts. While in administration, the business is protected from creditor pressure.

Sometimes, a pre-pack sale is used, where assets are sold quickly to a new company. This approach is regulated to protect creditors.

Informal Restructuring

Companies may restructure informally by negotiating directly with creditors. For example, HMRC may agree to a Time to Pay arrangement. Landlords or suppliers might accept new terms. This avoids professional fees but offers no legal protection. Creditors can still issue a winding-up petition if talks fail.

Creditors’ Voluntary Liquidation (CVL)

If recovery is not possible, a creditors’ voluntary liquidation (CVR) may be the best route. Directors start the process by passing a resolution and appointing a licensed insolvency practitioner. The liquidator sells assets and deals fairly with creditors.

A CVL reduces the risk of worse outcomes compared to compulsory liquidation. Directors may also be eligible for redundancy pay, which can help cover costs.

Compulsory Liquidation

If creditors lose patience, they may apply to the court for a compulsory liquidation through a winding-up petition. This removes control from directors and places the process in the hands of the Official Receiver or an insolvency practitioner. Directors’ conduct will be reviewed, and any evidence of wrongdoing could result in penalties. Compulsory liquidation should be avoided if possible.

Costs and Funding

The cost of each process depends on factors such as the company’s size, the number of creditors, and whether assets are available to sell. In an MVL or CVL, the insolvency practitioner’s fees are often covered by asset sales. Directors may also claim redundancy pay if eligible.

Company dissolution only costs the filing fee at Companies House, but it can only be used for solvent companies. Tax outcomes should also be considered. An MVL often leads to capital gains tax treatment, which may be more efficient than income tax. Anti-avoidance rules apply to stop directors from repeatedly liquidating and restarting similar businesses.

Pitfalls to Avoid

• Trying to strike off a company with debts. Creditors or HMRC will likely object.
• Leaving assets in the company before dissolution. These pass to the Crown.
• Waiting for creditors to act. This can result in a winding-up petition and loss of control.
• Failing to act when the business is insolvent. Directors may face personal consequences.

What to Prepare

Before deciding, directors should gather up-to-date financial records. These include the balance sheet, details of creditors, tax liabilities, employee information, and any personal guarantees. Having this information ready helps when discussing options with an insolvency practitioner.

Frequently Asked Questions

Can I strike off my company if it has debts?

No. Company dissolution only applies to solvent companies. Trying to strike off with debts can lead to restoration and legal action.

Is an MVL always better than dissolution?

Not always. Dissolution is fine for simple companies with low-value assets. An MVL is more suitable when there are larger assets or possible unknown liabilities.

What happens to assets left in the company after strike-off?

They automatically become property of the Crown.

Will creditors accept an informal restructuring?

Sometimes. However, since it offers no legal protection, creditors can still take action if they are not satisfied.

Conclusion

There are many alternatives to liquidation. For solvent businesses, an MVL or company dissolution may be appropriate. Insolvent companies may be able to continue to trade using a company voluntary arrangement, administration, or informal restructuring. If the business is beyond rescue, a creditors’ voluntary liquidation CVL allows closure in a controlled way, while compulsory liquidation should be avoided wherever possible.
The right choice depends on your company’s situation. Directors should consider the risks, costs, and duties involved in each option. Taking advice early is key to protecting yourself and achieving the best outcome. Speaking to an insolvency professional for a free consultation can help clarify which route is most suitable for your circumstances.