What Is the Difference Between CVL & MVL?

For anyone considering an exit strategy for their business, it’s important to understand the options available and the implications of those options. Members’ voluntary liquidation and creditors’ voluntary liquidation (MVL & CVL) are two liquidation processes you may be considering. If so, you may wonder about the difference between creditors’ and members’ voluntary liquidation.

What Are the Main Differences Between an MVL & a CVL?

In considering members’ voluntary liquidation and creditors’ voluntary liquidation there are similarities and differences. Both are voluntary liquidation options which result in the company’s assets being realised and the company being ‘wound-up’. The main difference between creditors’ and members’ voluntary liquidation is the solvency status of the company.

Creditors’ voluntary liquidation vs members’ voluntary liquidation translates to an insolvent company choosing liquidation vs a solvent company choosing liquidation. In simple terms, with an MVL the company is solvent and able to meet to meet all its financial commitments. With a CVL, the company is not solvent and voluntary liquidation is one option available to the company to repay creditors.

That key difference between creditors’ and members’ voluntary liquidation, also has a big impact on what happens to the value extracted from the company’s assets when it is liquidated. Where does the money from the sale of assets go with an MVL vs CVL?

Under a CVL the assets are sold, and the funds are used to repay outstanding debt to creditors. With an MVL the value extracted from the company is directed to the members of the company (ensuring all liabilities are first covered by the company).

MVL vs CVL: Which One Is Right for My Business?

If you are weighing up creditors’ voluntary liquidation vs members’ voluntary liquidation, you may be wondering which one is right for your business. That will depend on several factors:

1. Is your company solvent (and able to repay any creditors within 12 months) or is it insolvent?
2. Are you (or key stakeholders) looking to retire or wanting to restructure and reallocate resources within a business?
3. Are you looking for a tax-efficient exit strategy from your company?
4. Are you trying to recover losses from a company that can no longer meet its financial obligations?

Whichever option is most suited to your company, be it an MVL vs CVL, both are legal processes which must be conducted by a licenced insolvency practitioner.

When Would a MVL Be the Best Choice?

Both members’ voluntary liquidation and creditors’ voluntary liquidation result in the company ceasing to exist and being removed from Companies House register. That being the case, when would a MVL be the best choice for your company?

If your company is solvent and will continue to be so throughout the winding-up process, an MVL is the best choice for your company. You will need to sign written Declaration of Solvency as part of the MVL process. This is a legal document that needs to be signed in good faith and will have legal implications if it is found to be an untrue declaration of solvency.

An MVL will enable you to realise the assets of your company and extract the value of the company to pay out any existing liabilities and be directed to the members of the company.

One of the key advantages of an MVL is that the financial gain extracted from the company under members’ voluntary liquidation is considered capital gains rather than income, so is taxed at a lower rate. Furthermore, under an MVL, you may be eligible for entrepreneurial assistance which may further lower the rate you pay on capital gains tax. This can make a very profitable exit from your company.

As well as the financial gains, choosing an MVL vs CVL means you aren’t entering an insolvency process, so your professional reputation and credit score will not be impacted in the way it may be with a CVL.

When Would a CVL Be the Best Choice?

If your company is insolvent or likely to become insolvent during the next 12-month period, and 75% of your shareholders agree to it, a CVL would be the best choice for your company. Choosing an MVL and then becoming insolvent could result in transferring from members’ voluntary liquidation to creditors’ voluntary liquidation. If there is any risk of insolvency, a CVL would be the best choice for your company rather than an MVL.

Professional Advice for Creditors’ Voluntary Liquidation

If you would like to find out more about members’ voluntary liquidation and creditors’ voluntary liquidation, contact Irwin Insolvency today for professional advice about choosing the best liquidation option for your company.