Voluntary Liquidation Explained: Procedure, Costs and What It Means for Directors

Voluntary liquidation is a formal process used to close a limited company and bring its affairs to an orderly conclusion. Unlike compulsory liquidation, which is generally initiated through the courts, voluntary liquidation begins with a decision made by the company’s directors and shareholders.

There are two main forms of voluntary liquidation: a Creditors’ Voluntary Liquidation for an insolvent company and a Members’ Voluntary Liquidation for a solvent company. Choosing the correct procedure depends largely on whether the business can pay its debts.

This guide explains what voluntary liquidation is, how the voluntary liquidation procedure works, the costs that may be involved and the key points directors should consider before closing a company.

What Is Voluntary Liquidation?

Voluntary liquidation is a formal company closure process in which shareholders agree to wind up the business and appoint a licensed insolvency practitioner to act as liquidator.

The liquidator takes control of the company, deals with its assets and liabilities, communicates with creditors and completes the necessary statutory work. Once the process has been completed, the company is removed from the Companies House register and ceases to exist.

There are two types of voluntary liquidation:

• Creditors’ Voluntary Liquidation (CVL): Used when a company cannot pay its debts.
• Members’ Voluntary Liquidation (MVL): Used when a company is solvent and can pay its debts but its shareholders want to close it.

The UK Government distinguishes these two procedures according to whether the company is able to meet its liabilities.

The voluntary liquidation of a company should not be confused with dissolution or strike off. Liquidation is a structured process involving an insolvency practitioner, whereas dissolution is generally used to close a company with no outstanding debts or unresolved affairs.

Why Would a Company Choose Voluntary Liquidation?

The reasons for choosing voluntary liquidation will depend on the company’s financial position.

An insolvent company may enter a CVL because it can no longer pay suppliers, lenders, HMRC or other creditors. The directors may believe that the business cannot realistically recover and that continuing to trade could make the situation worse.

Choosing a CVL allows directors to take action rather than waiting for a creditor to pursue compulsory liquidation. It provides an organised process for closing the business, realising its assets and distributing available funds among creditors.

A solvent company may instead use an MVL because:

• The directors or shareholders are retiring.
• The business has completed its purpose.
• The company is no longer required following a restructuring.
• Shareholders want to extract remaining funds and assets.
• The owners have decided to stop trading while the company remains financially healthy.

Voluntary liquidation does not automatically mean that a business has failed. In an MVL, it can simply be a planned and orderly way to close a successful company.

What Is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation, commonly shortened to CVL, is used when a company is insolvent and cannot pay its debts as they fall due or has liabilities greater than the value of its assets.

Despite the name, a creditor voluntary liquidation is usually initiated by the company’s directors and shareholders rather than its creditors. Creditors are involved in the process and are given information about the company’s financial position, but the directors normally begin by seeking advice from a licensed insolvency practitioner.

Once the liquidator is appointed, they take control of the company’s affairs. The business usually stops trading, employees may be made redundant, assets are identified and sold, and available funds are distributed to creditors according to the statutory order of priority.

Directors of an insolvent company have duties to protect creditors’ interests. These duties continue whether the company is still trading or has already stopped.

A CVL may be considered where:

• The company cannot pay HMRC, suppliers or lenders.
• Creditor pressure is increasing.
• Cash flow problems are no longer temporary.
• Recovery options have been explored but are not viable.
• Continuing to trade could increase creditor losses.

The liquidator will also review the conduct of those who managed the company before liquidation. Directors must cooperate and provide the company’s books, records and other requested information.

What Is a Members’ Voluntary Liquidation?

A Members’ Voluntary Liquidation, or MVL, is a formal process for closing a solvent company. It is used when the company can pay its debts, including interest, but the shareholders no longer wish to continue operating it.

As part of the members voluntary liquidation procedure, the directors must review the company’s financial position and make a formal declaration of solvency. This confirms that they believe the company can pay its liabilities within the required period.

A licensed insolvency practitioner is then appointed as liquidator. They will settle remaining liabilities, realise or distribute company assets and return surplus funds to shareholders.

An MVL may be suitable when a company has retained profits or valuable assets to distribute. However, directors should obtain both insolvency and tax advice before proceeding, as individual circumstances can affect whether an MVL is the most appropriate closure route.

Voluntary Liquidation Procedure: How Does It Work?

The exact voluntary liquidation procedure differs between a CVL and an MVL, but the main stages generally include:

1. Seeking professional advice
   Directors speak to a licensed insolvency practitioner, who reviews the company’s financial position and explains the available options.
2. Preparing company information
   Financial records, details of assets, liabilities, creditors and employees are gathered. For an MVL, the directors also prepare a declaration of solvency.
3. Passing the relevant resolutions
   Shareholders must approve the decision to wind up the company and appoint a liquidator. A voluntary liquidation begins when the winding-up resolution is passed.
4. Appointing the liquidator
   The insolvency practitioner takes control of the company. Directors usually lose their authority to act on its behalf unless the liquidator permits it.
5. Realising assets and settling liabilities
   The liquidator identifies and sells company assets, agrees creditor claims and distributes available money in the required order. In an MVL, remaining funds are distributed to shareholders after liabilities have been paid.
6. Closing the company
   Once the liquidator has completed their work and filed the necessary documents, the company is eventually dissolved and removed from the register.

The length of the process varies according to the complexity of the company’s affairs, the number of creditors, the assets involved and whether any disputes or investigations arise.

Voluntary Liquidation Costs: What Should Directors Expect?

Voluntary liquidation costs are not fixed. The amount will depend on the type of liquidation and the work required.

Relevant factors may include:

• The number and type of company assets.
• The volume of creditors and employee claims.
• The quality of the company’s financial records.
• Whether assets need to be valued or sold.
• Outstanding tax or legal matters.
• The complexity of the liquidator’s investigations.
• The time needed to complete the process.

CVL costs are normally paid from the company’s available assets. However, if the company has few or no assets, directors or shareholders may need to fund some of the cost personally to begin the process.

Members voluntary liquidation costs can also vary. A straightforward solvent company with accurate records and limited liabilities is likely to cost less than an MVL involving complex assets, tax issues or distributions.

Directors should request a clear explanation of the expected fees, what those fees include and whether additional costs could arise. Choosing a liquidation process based on price alone may not provide the support required for a complicated company closure.

Is Voluntary Liquidation the Right Option for Your Company?

Voluntary liquidation may be appropriate when a company needs to close through a structured, professionally managed process.

A CVL may be suitable if the business is insolvent and there is no realistic prospect of recovery. An MVL may be appropriate if the company is solvent but has reached the end of its useful life.

However, liquidation is not always the only option. An insolvent company may have alternatives, such as a Company Voluntary Arrangement, refinancing, restructuring or administration. A solvent company with no complex assets may be able to consider dissolution instead.

Directors should seek advice as early as possible, particularly where debts are increasing or the company is struggling to pay HMRC and other creditors. Early advice provides more time to assess the available options and reduces the risk of directors continuing to trade when doing so could worsen creditors’ losses.

Simply Corporate provides clear and confidential advice to directors considering voluntary liquidation or other business closure and recovery options. Our team can review your position, explain the available routes and help you understand the next steps.