Revealed: Big Four CVL myths, Top Three MVL myths
Just as there are right now with private sector IR35 reform, dangerous myths are doing the rounds with liquidation, often relating to personal liability upon business failure, the term ‘cheap liquidation’ and what’s involved with ‘DIY’ company liquidations, writes Jon Munnery of UK Liquidators, the UK’s largest company liquidation service.
Pulling down the wool
With these three myths respectively, there is from their distributors a deliberate attempt to misinterpret; exaggerate, and mislead (-- the ‘DIY’ endorsers tend not to provide an accurate outlook on either the avoidable costs or the applicable caveats).
It is therefore vital we help pull down the wool so that contractors – the very ones targeted by the April 2021 measures to realign worker taxation – can spot the difference between fact and fiction when it comes to the routes of Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) in the event of business closure, otherwise they’ll be targeted, and potentially hit twice.
Liquidate without being laughed at
As with conducting a financial health check on any business, the value of assets and liabilities will determine if the business is in the black, or the red.
Such findings will determine the framework of the liquidation route you will potentially take, the overall cost incurred to conduct the process, and the services required from a ‘Licensed Insolvency Practitioner.’ Like such ‘LIPs,’ this piece will guide you through how to seek the most efficient route when it comes to liquidating your company without falling prey to false claims.
Big Four ‘CVL’ Myths
1. ‘Liquidation will make all of my/your company debts disappear.’
While this is the case for most, if any have personal guarantees attached to them, or have been incurred as a result of director misfeasance, the liability could sit with the director.
2. ‘Liquidation will affect my credit rating.’
As the limited company is its own legal entity, there is no automatic direct impact on the director’s credit file. However, if personal guarantees have been provided, and the director defaults on such guarantees, then this is likely to impact your personal credit rating. By entering into a personal guarantee agreement, you are accepting personal liability for the debt in question which will directly impact your personal credit score.
3. 'I won’t be able to be a director of a company moving forward.'
Unless you are disqualified as a director or declare yourself bankrupt, there are no restrictions on you taking the appointment of a company director at a future juncture. You will, however, have to ensure that any such appointments do not breach the Insolvency legislation regarding the re-use of a prohibited company name.
4. 'I will have to attend a meeting with my company’s creditors and be interrogated.’
Changes brought into the Insolvency Rules (effective from April 6th 2017), mean that there is no automatic requirement to hold a physical creditors’ meeting to place a company into liquidation. Such a meeting may, however, be requisitioned by creditors holding the requisite majorities.
Top Three ‘MVL’ Myths
1. ‘I am automatically entitled to Entrepreneurs’ Relief in the MVL process.’
Entitlement to claim Entrepreneurs’ Relief, now rebranded as Business Asset Disposal Relief, on distributions is dependent upon the individual’s circumstances. We would always recommend consulting with your accountancy firm or another independent third-party regarding your entitlement to make such a claim; it’s definitely not guaranteed.
2. ‘I need to sell all company assets prior to commencing an MVL process.’
Physical assets can be distributed to shareholders in an MVL process by way of ‘Distribution in Specie’, providing the relevant resolutions were passed at the general meeting appointing the liquidator. Any such distributions would form part of your taxable gains for self-assessment purposes.
Additionally, it ought to go without saying, but where there is more than one shareholder, any such assets must be distributed according to a company’s shareholding. Therefore, certain assets may make a distribution in specie difficult, where it, or its ownership, cannot be split.
3. ‘Tax matters can wait to be finalised once the liquidator is appointed.’
While the appointed liquidator can assist in finalising the company’s tax position with HMRC, it is more beneficial and cost-efficient to have this dealt with and finalised before commencing the MVL process.
This makes for a swifter MVL process, but also if the Company owes HMRC, any outstanding debts at the date of liquidation will automatically be charged 8% statutory interest! If such debts are paid before commencing the MVL process, this interest does not accrue.
Not myths, but the following hard truths limited company contractors ought to also know
The Members’ Voluntary Liquidation route instantly targets a different class of company directors as it is a solvent liquidation process for financially viable businesses reaching their natural end.
Since the chancellor of the exchequer Rishi Sunak labelled Entrepreneurs’ Relief ‘expensive’, ‘ineffective’ and ‘unfair’, he reduced the lifetime allowance from £10m to £1m, as announced at Spring Budget 2020.
Yet tax relief granted by the scheme is still widely viewed as universal, magnetising retirees and exiting company directors to the MVL process. The process can indeed prove financially lucrative. However, your financial return will be mitigated by numerous individual factors, including eligibility to Business Asset Disposal Relief. Don’t let promotional emails in your inbox from the company closure industry’s less-than-reputable providers fool you otherwise!
And if you find yourself battling between conflicting claims, unverifiable knowledge and experiences which sound exaggerated, seek advice from a trusted, well-established, and verifiable insolvency specialist. A licensed insolvency practitioner can help navigate you through the decision-making process and verify each stage of the company liquidation journey – as it is in reality.