How do the procedures work and when can you use them?
There are three liquidation procedures to close a limited company in Scotland.
The right procedure for you will depend on whether your business is solvent or insolvent.
If your company cannot pay its debts when they’re due (it’s insolvent), you can liquidate it voluntarily by initiating a Creditors’ Voluntary Liquidation. Alternatively, a creditor can close it down via Compulsory Liquidation.
If your company can pay all its debts (it’s solvent), you can close it voluntarily via a Members’ Voluntary Liquidation. There are other methods you can use to close solvent limited companies, but an MVL is likely to be the right choice if you have retained profits or assets to distribute in a tax-efficient way.
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How do you liquidate an insolvent company in Scotland?
There are two ways to liquidate companies that cannot pay their debts when they’re due.
Creditors’ Voluntary Liquidation (CVL)
When your business becomes insolvent, as a company director, you are legally required to prioritise the interests of your creditors. If your company is no longer financially viable, ceasing trading and liquidating it voluntarily via a Creditors’ Voluntary Liquidation will help to reduce your creditors’ losses.
The first step is appointing a licenced Insolvency Practitioner to act as the liquidator. They will take control of the company and wind down its affairs. They will make staff redundant, end ongoing contracts and value and sell the company’s assets. They’ll then use the proceeds from the sale of assets to repay the creditors in a strict order, and any debts they cannot repay in full will be written off.
As part of the process, the liquidator will investigate the conduct of the directors during and leading up to the insolvency. Entering into liquidation voluntarily via a CVL reduces the risk of wrongful or unlawful trading that could lead to penalties such as personal liability issues and director disqualifications.
Another benefit of entering a Creditors’ Voluntary Liquidation is that you could be eligible for director’s redundancy pay. Payouts in Scotland average around £10,000, providing some financial security while you consider your next steps.
Compulsory Liquidation
The other way to close an insolvent company is via Compulsory Liquidation. If you owe a creditor £750 or more that they have not been able to collect, they can issue you with a Winding Up Petition as a last resort. If you do not pay or dispute the debt, the court will make a Winding Up Order and an Insolvency Practitioner will be appointed to liquidate the company. Compulsory Liquidation is most commonly used by HMRC for unpaid tax bills.
Much like a Creditors’ Voluntary Liquidation, the liquidator will take control of the company’s assets and sell them to repay its creditors in order of priority. They will also investigate the company’s affairs and the conduct of the directors. If they uncover any wrongdoing, such as you continued to trade when the company was insolvent, they will report it to the Insolvency Service and you could receive a penalty.
How do you liquidate a solvent company in Scotland?
Members’ Voluntary Liquidation (MVL)
Only companies that can repay all their debts can use this liquidation procedure. When a business enters an MVL, the directors must sign a Declaration of Solvency to confirm the company is solvent.
In an MVL, the company directors appoint their choice of liquidator to wind down the company’s affairs and sell its assets. In this case, they will use the proceeds to repay any creditors in full before distributing the rest of the money among the shareholders.
On the face of it, Voluntary Dissolution is a cheaper way to close a solvent limited company as there’s no liquidator’s fee to pay. However, in Voluntary Dissolution, the amount of money that can distributed as capital to the shareholders is capped at £25,000. Anything over that will be treated as income.
If you close your company via an MVL, all distributions are subject to Capital Gains Tax. You may also be eligible for Business Asset Disposal Relief, so you’ll only pay 10% on qualifying assets. If your company has £35,000 or more of profits to distribute, a Members’ Voluntary Liquidation will usually be the most cost-effective way to close it down.
Need advice?
At Scotland Liquidators, we have extensive experience and work to protect your position while guiding you through the liquidation process. Please get in touch for a free, same-day consultation or to arrange an in-person meeting at one of our offices throughout Scotland.
I knew I needed to close my company but I wasn’t sure how to go about this with large debts that I was unable to repay. Scotland Liquidators clearly explained my options and held my hand throughout the entire process.
Catherine Muller | Director
I would highly recommend Scotland Liquidators to anyone considering closing their business. From the first phone call I knew where I stood and what my options were. I cannot thank them enough.
Jonathan Booth | Director
Scotland Liquidators helped me close my company last year after I made the tough decision to stop trading. My advisor was patient, knowledgeable, and supportive from start to finish. Many thanks.
Colin Franklin | Former CEO
