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Understanding Voluntary Liquidation

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No one hopes that it will become a reality for their business, but Members Voluntary Liquidation (more commonly known as voluntary liquidation) can affect many business owners. Liquidation in its various forms can evoke fear and anxiety for business owners, but when the process is understood it may not be so daunting and stressful.

What is it?

Voluntary Liquidation is a term used for the process of winding up insolvent companies; insolvent because they cannot afford to repay their creditors. A closing down process initiated by the company’s members, it brings a formal end to the business and allows for the distribution of remaining assets and payments to creditors. Members Voluntary Liquidation can occur when the directors of a company have the foresight to know that while the company is currently solvent, it would be wise to conclude the company’s trade.

When is it used?

When a solvent company needs to be wound up, perhaps because it has come to the end of its useful life, Members Voluntary Liquidation may be appropriate. Reasons why a company may be wound up and voluntary liquidation appropriate include:

  • A family business where the owners are ready for retirement
  • Shareholders making the decision to retire, with existing company assets that will be transferred to a personal estate
  • Conflict or some other sort of breakdown in relationships between directors
  • The company no longer being a viable entity as a result of changes in the market

What are the advantages?

One of the main advantages of Members Voluntary Liquidation is that it is generally less expensive and less formal than Creditors Voluntary Liquidation. Sometimes, Members Voluntary Liquidation can be used to break up or separate businesses within a company.

Members Voluntary Liquidation officially brings the life of a company to an end. It leaves no unfinished business and very often presents a tax efficient departure from the company for shareholders. Within these arrangements, the liquidator who is appointed takes responsibility for the allocation of any remaining assets and funds between shareholders.

How long does it take?

The length of time required for a Members Voluntary Liquidation to be completed varies depending on the size of the business and the complexity of the issues bringing its life to an end. Having said this, the Members Voluntary Liquidation process can be so straightforward that it can be completed in a number of weeks in some circumstances.

There is a definite process to be followed beginning with company directors concurring with shareholders that the most appropriate and effective solution is to voluntarily liquidate. In so many cases, this decision is made with respect to the fact that opting to liquidate will enable repayment to creditors and shareholders.

Critical to this process is a statutory declaration made by company directors to claim that the company that is being wound up will be in a position to completely pay its debts within twelve months of the winding up process beginning.

If a business is to be placed into liquidation, an insolvency practitioner needs to be appointed and charged with ensuring that creditors receive payment and all assets are dealt with. Should the appointed liquidator find that the company is not able to fully pay its debts, a Members Voluntary Liquidation can then become a Creditor’s Voluntary Liquidation.

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