The difference between solvent and insolvent liquidation – explained

When it comes to liquidating your contractor limited company there are two main options, and which is right for you depends on your company’s financial health. The question you first need to ask is, writes Richard Hunt of SFP Group, ‘Is your company solvent or insolvent?’   

Solvent vs insolvent

A solvent liquidation is called a Members’ Voluntary Liquidation (MVL) and can be carried out if your contractor company is financially-healthy and you wish to close it in a cost-effective and tax-efficient way.  

An insolvent liquidation or Creditors’ Voluntary Liquidation (CVL) is a liquidation option if your limited company is unable to pay its debts and is in financial distress.  

As well as CVL and MVL options, you can choose to close down your company through a dissolution, otherwise known as a ‘strike off.’  

What about dissolution if I’m closing a company?

A dissolution is the self-processed closure of your company, for a small fee payable to Companies House. While it’s still not a massive amount, this Companies House fee and many others have increased since May 1st 2024, so be aware! 

Keep in mind, dissolution may seem like the cheap option, but it could result in you paying more tax to HMRC than if you liquidated. Dissolution can also become problematic if your company has outstanding debts.  

Further be aware, your creditors will be informed of your intention to dissolve your limited company and can object if they are owed money, halting the process and in some cases leaving you needing legal representation. Remember, a company can also be restored even after dissolution, in which case creditors could take recovery action.  

Our recommendation is that when considering dissolution, carefully assess your company’s financial status to ensure it really is the best option before you proceed.  

What is solvent liquidation?

A solvent liquidation, or Members’ Voluntary Liquidation (MVL), is the process of closing down or ‘liquidating’ your financially-sound company.  

Your company can enter into an MVL if it has sufficient assets and funds to pay its debts in full, and the costs of the liquidation.   

An MVL might be more tax-efficient than dissolution if your company: 

• Has at least £25,000 in net assets after all debts have been paid, and; 

• Has been trading for at least 24 months   

There are many reasons why you may wish to close your solvent contractor company.  

You may wish to retire, go back into employment or release cash tied up in the company to use elsewhere.  

Whatever the reason you must be able to pay off all the company’s debts and the costs of the MVL. Once these have been paid, all remaining funds will be distributed to the company’s shareholders.   

It’s a professional, controlled and (in most cases) a quick way of closing down your company which is carried out by a licensed Insolvency Practitioner (IP).  

An MVL may also have substantial tax advantages in the form of Business Asset Disposal Relief (formally known as Entrepreneurs’ Relief). This benefit results in paying tax at a fixed rate of only 10% -- on your gains from the company’s assets. 

If you would like to learn more about how an MVL could save you potentially thousands of pounds in the closure of your company, then visit CUK MVL Blog.

What is insolvent liquidation?

An insolvent liquidation, or Creditors Voluntary Liquidation (CVL),  is carried out when your company is in financial distress and unable to pay its debts.  

A limited company can enter into a CVL if:  

• Your company has more debts than assets 

• Your company cannot pay its debts as they become due  

What is a Creditor’s Voluntary Liquidation? 

A CVL is carried out by an IP, and it’s focused on realising the company’s assets to distribute any funds after costs to creditors in a specific order.  

The process is usually longer and more complicated than a solvent liquidation, as the appointed IP will have to conduct investigations into the previous running of the company.  

The IP will ensure that the process is carried out and complies with legal requirements and obligations in the interests of the company’s creditors.  

If you want to learn more about insolvent liquidation, then visit CVL page.

Difference between a solvent and insolvent liquidation: at-a-glance

Understanding solvent and insolvent liquidations

It is important for contractors to fully understand the difference between solvent and insolvent liquidations.  

Although both ultimately result in the closure of your company they impact you, the company shareholders, and its creditors in significantly different ways.  

To be sure you know which is the right path for your company, it is advisable to seek professional advice from a licensed Insolvency Practitioner. They will be able to assess your company’s situation and provide you with available options for your circumstances.  

Are you ready to discuss your contractor limited company liquidation? Or perhaps you’d just like a company financial health check?  

Either way, as SFP Group, we have over 25 years of experience in solvent and insolvent company liquidations.  

Reach out to us today to discuss your requirements.