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Difference between a Creditors’ and Members’ Voluntary Liquidation

The main difference between a Members’ Voluntary Liquidation (MVL) and a Creditors’ Voluntary Liquidation (CVL) is that the MVL process is used by solvent companies to close down their business. In contrast, although still voluntarily undertaken, a CVL involves closure of a company that is insolvent.

After an MVL the proceeds of sale go to the shareholders, whereas a CVL sees the cash realised from the sale of assets returned to creditors.

As the terms suggest, these forms of liquidation are undertaken voluntarily by directors who hold meetings with shareholders and creditors to put forth the company’s financial position, and seek the relevant resolution to wind up the company.

This should not be confused with Compulsory Liquidation where legal action is taken against the company by a secured or unsecured creditor.

Begbies Traynor can offer guidance on whether voluntary liquidation is right for your company. Take advantage of our free initial consultation at any of our offices nationwide.

Differences between a CVL and an MVL can be identified in several areas:

• The reasons for entering the procedure, and the most desirable outcome
• Treatment of employees with regard to TUPE regulations and redundancy
• The likelihood of directors becoming liable for company debts
• Level of creditor returns, and whether debts are fully repaid
• Creditors’ ranking in liquidation

Members Voluntary Liquidation
An MVL can be used by directors to extract the value of a company no longer needed. It may be that the business concerned is part of a larger group and serves no further purpose. Whatever the reason, by undertaking an MVL directors are seeking to close the company in the most tax-efficient manner possible.

The accurate valuation of assets is essential to ensure compliance with MVL eligibility criteria, however. Valuations and calculations resulting in an incorrect Declaration of Solvency can be disastrous for both company and directors. It is vital, therefore, that a professional insolvency expert is appointed to assist in this regard.

Problems sometimes occur when additional creditors see notice of the Liquidation in The Gazette. They decide to make new claims against the company, which can move it from a position of apparent solvency into indisputable insolvency.

The difficulties of accurately valuing contingent liabilities make it imperative to seek the guidance of experts in this field.

Let us explain what a Statutory Declaration of Solvency represents.Essentially you are swearing on oath that the company is able to repay its debts, including interest, within a period of 12 months. The ramifications of falsely swearing an oath of solvency can be serious.

Fines are common for directors who make a false declaration, with penalties including disqualification as a director for up to 15 years. Even a prison sentence is a possibility, depending on whether deliberate fraud is uncovered.

Members’ Voluntary Liquidation and TUPE
The Members’ Voluntary Liquidation process may involve part of the Transfer of Undertakings (Protection of Employment), or TUPE regulations. Sections 4 and 7 may offer protection of employee rights, including the right to claim redundancy pay and/or unpaid wages. This varies with individual cases, however, depending on whether the transfer of assets is relevant.

Companies should issue a Members’ Voluntary Liquidation notice to members of staff so they are aware of, and understand, what is going to happen. If this is not carried out as required by law, employees may be able to claim unfair dismissal against the company at a later date.

Tax treatment during Members’ Voluntary Liquidation
One of the reasons why MVLs are popular is the tax treatment of capital released to directors and shareholders. Taking this route to closure avoids the application of income tax, instead attracting capital tax, and also enabling the use of Entrepreneurs’ Relief where applicable.

Entrepreneurs’ Relief can further reduce the tax applied – sometimes down to an effective rate of 10%.

Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation involves directors taking action to prevent the compulsory winding-up of their business. This limits their personal liability for company debts, and averts the threat of compulsory winding-up which may be the goal of one or more creditors.

A CVL protects creditors’ rights in liquidation – their interests are at the forefront during this process, with the aim being to realise company assets and pay creditors a dividend.

Constant threats of legal action by creditors, combined with a realisation that their company is no longer viable in the long term, is often the catalyst for directors who take this course of action.

Benefits to directors and creditors include:

• A potentially enhanced dividend for unsecured creditors when compared with Compulsory Liquidation
• Reduced exposure to claims of unlawful trading or improper conduct for directors

Creditors’ Voluntary Liquidation and TUPE regulations
As the company is being liquidated and will close, there is no transfer of assets. Therefore, TUPE regulations may not be applicable to a CVL, but employees may still be able to claim redundancy pay, unpaid wages, outstanding holiday pay and pay in lieu of notice from the Redundancy Payments Office.

Creditors’ ranking in liquidation
If there are insufficient monies from the sale of assets to repay all creditors, this is the order in which creditors are ranked:

• Holders of a fixed charge
• Fees of the liquidator
• Preferred creditors
• Holders of a floating charge
• Unsecured creditors

One of the Liquidator’s duties during a Creditors’ Voluntary Liquidation is to prepare a report for the Secretary of State in relation to the conduct of directors leading up to the Liquidation.

This is standard procedure, and the fact that you have voluntarily liquidated the company should be a favourable point, but if signs of unlawful trading emerge, as a director you may face further investigation by the Insolvency Service.

Potential consequences of acting improperly or trading unlawfully are disqualification from directorship for up to 15 years, a fine, and in the most serious cases a prison sentence.

To take advantage of Begbies Traynor’s wide industry knowledge and experience, call our licensed Insolvency Practitioners. We have offices spanning numerous UK locations, and can arrange a free initial consultation.

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