Members' or creditors' voluntary liquidation: which one applies

Two procedures with one name

Voluntary liquidation is the shareholders' decision to bring the company to an end through a licensed insolvency practitioner, as opposed to a compulsory liquidation ordered by the court on a creditor's petition. It comes in two forms that share the name and almost nothing else.

A members' voluntary liquidation is for a solvent company. The directors declare that it can pay everything it owes, the shareholders resolve to wind it up, and the liquidator's job is to collect the assets, settle the creditors in full with interest, and distribute the surplus to the shareholders. Creditors have no say because they are being paid.

A creditors' voluntary liquidation is for an insolvent company. The directors cannot declare solvency, the shareholders resolve to wind it up anyway, and the creditors take over the choice of liquidator because it is their money that is at stake. The liquidator's job includes investigating why the company failed and what the directors did about it.

Which one applies is decided by a single question, whether the company can pay its debts in full within twelve months. The directors' duties once insolvency is in view are in our guide to directors' duties in financial difficulty.

The declaration of solvency

Section 89 of the Insolvency Act 1986 is the gateway. The directors, or a majority of them, make a statutory declaration that they have made a full inquiry into the company's affairs and have formed the opinion that it will be able to pay its debts in full, together with interest at the official rate, within a period not exceeding twelve months from the start of the winding up. The declaration has to be made within the five weeks before the resolution to wind up is passed, or on the day of the resolution before it is passed, and it must contain a statement of the company's assets and liabilities at the latest practicable date. Gov.uk explains that it is signed in front of a solicitor or notary public, and that in Scotland the equivalent is form 4.25 (Scot).

The declaration is filed at Companies House within fifteen days of the resolution, and failing to file it attracts a fine. The shareholders then pass a special resolution to wind up under section 84, which needs 75 per cent of the votes cast, and the resolution is advertised in the Gazette within fourteen days.

The declaration carries a personal risk. A director who makes it without reasonable grounds for the opinion commits an offence punishable by imprisonment or a fine or both, and if the company is wound up within five weeks of the declaration and the debts are not paid within the stated period, it is presumed that the director did not have reasonable grounds unless the contrary is shown. Section 95 supplies the consequence: a liquidator who forms the view that the company cannot pay in full within the period must, within seven days, prepare a statement of affairs, send it to the creditors and seek their nomination of a liquidator, which converts the members' voluntary liquidation into a creditors' one. The tax advantages disappear with it.

The tax position in a members' voluntary liquidation

A solvent company is put into liquidation for the tax treatment. Distributions made by a liquidator are capital, so the shareholder pays capital gains tax on them, where a dividend would have been taxed as income. For a company with retained profits above the £25,000 limit that applies to distributions before a strike off, that difference is usually the whole point.

Where the shareholder qualifies for Business Asset Disposal Relief, the gain is taxed at the relief's rate up to a lifetime limit. On 22 September 2026 gov.uk states the rate at 18 per cent for disposals from 6 April 2026, having been 14 per cent for disposals between 6 April 2025 and 5 April 2026 and 10 per cent before that. The relief has its own qualifying conditions about the shareholder's holding and role and the period before the company stopped trading, and the rate has moved twice in two years. The shareholder's accountant should confirm the position before the resolution is passed, while the timing can still be changed.

The liquidator also obtains clearance from HMRC before the final distribution, which is part of what the fee pays for, and which a strike off does not give.

The anti-avoidance rule on winding up

Section 396B of the Income Tax (Trading and Other Income) Act 2005 is a targeted anti-avoidance rule aimed at people who liquidate a company to take the profits as capital and then carry on the same trade through a new one. Where it applies, the liquidation distribution is taxed as income after all.

HMRC's Company Taxation Manual sets out the four conditions, all of which have to be met. Condition A: the individual had at least a 5 per cent interest in the company immediately before the winding up. Condition B: the company was a close company at some point in the two years before the winding up began. Condition C: within two years after the distribution, the individual carries on, or is involved with, the same trade or a similar one, whether directly, through a partnership, through another company or otherwise. Condition D: it is reasonable to assume that the main purpose, or one of the main purposes, of the winding up is to avoid or reduce income tax.

The rule applies to distributions from 6 April 2016. An owner who is retiring, or selling the trade to an unconnected buyer, or moving into something different, is outside condition C. An owner who closes the company in March and opens a similar one in April is inside it and is then arguing about condition D. The two-year period after the distribution is the one to plan around.

Starting a creditors' voluntary liquidation

The shareholders pass a special resolution to wind up under section 84, again with 75 per cent of the votes. Where a bank or other lender holds a qualifying floating charge over the company's assets, section 84 requires written notice to that lender first, and the resolution can only be passed five business days after the notice unless the lender consents in writing. The resolution is advertised in the Gazette within fourteen days and filed at Companies House within fifteen.

The directors then prepare a statement of affairs under section 99, verified by a statement of truth, showing the company's assets, debts and liabilities, the names and addresses of its creditors, and the securities held by any of them and when they were given. In Scotland it is verified by statutory declaration instead. It has to be sent to creditors before the end of seven days beginning with the day after the resolution, and failing to do so without reasonable excuse is an offence. In practice the insolvency practitioner drafts it from the directors' information before the resolution is passed, so the documents go out together.

The creditors' decision and the liquidator's investigation

Section 100 gives the creditors the choice of liquidator. The company nominates one at the shareholders' meeting; the directors must then seek a nomination from the creditors by a decision procedure under the Insolvency (England and Wales) Rules 2016, and rule 6.14 requires the decision date to be not earlier than three business days after notice is delivered and not later than fourteen days after the resolution. The decision is usually taken by deemed consent, where the company's nominee is appointed unless enough creditors object, or by a virtual meeting. The statement of affairs has to reach creditors by the business day before the decision date. Where the creditors nominate somebody different, their nominee is the liquidator, subject to a right to apply to court within seven days.

The liquidator then does two things. The first is to realise the assets and distribute them in the order the Act lays down. In a small company the unsecured creditors at the end of that order usually receive little, and the directors' overdrawn loan account is often the largest asset there is.

The second is the investigation. Under section 7A of the Company Directors Disqualification Act 1986 the liquidator must send a conduct report to the Secretary of State within three months of the insolvency date, covering everybody who was a director in the three years before it. That report is what the Insolvency Service uses to decide whether to seek disqualification. Alongside it, the liquidator looks for anything that can be recovered for creditors: an overdrawn loan account, a preference to a connected creditor, a transaction at an undervalue, or trading that went on past the point where it should have stopped.

What happens to employees

In a creditors' voluntary liquidation the employees are almost always dismissed on the day the liquidator is appointed, because there is no business left to employ them. The company owes them wages, notice, holiday pay and redundancy, and it cannot pay.

The National Insurance Fund steps in. Under section 184 of the Employment Rights Act 1996 an employee of an insolvent employer can claim from the Fund, through the Redundancy Payments Service, arrears of pay for up to eight weeks, holiday pay for up to six weeks, statutory notice pay, and a statutory redundancy payment. Each week's pay is capped at the statutory limit, which gov.uk states as £751 a week for redundancies from 6 April 2026 and £719 before that date. The employee claims online with the liquidator's case reference, and the liquidator provides the information the Service needs.

In a members' voluntary liquidation the employees are also made redundant if the business is closing, but the company pays them itself, in full, as part of paying every creditor.

How long each takes

A members' voluntary liquidation of a company with cash, no property and a clean tax position can make its first distribution within weeks of the appointment and close within a year, the delay being largely HMRC clearance. One with property to sell, a pension scheme or an open tax enquiry runs longer, because the liquidator cannot distribute what might be needed.

A creditors' voluntary liquidation is in place within a few weeks of the directors' first meeting with the practitioner, which is the time it takes to give the floating charge notice, convene the shareholders, prepare the statement of affairs and run the creditors' decision procedure inside the fourteen days. The liquidation itself then runs for as long as there are assets to collect and claims to pursue, which in a small company with an overdrawn loan account to recover can be a year or more.

What each costs, as a shape

Both procedures are run by a licensed insolvency practitioner whose fee is the main cost, and in both the fee comes out of the company's assets before anybody else is paid. In a members' voluntary liquidation the fee is normally fixed in advance and scales with the number of assets to realise, creditors to settle and shareholders to distribute to; a company that is cash and nothing else sits at the bottom of the range. In a creditors' voluntary liquidation the fee is approved by the creditors and drawn from realisations, which means that where the company has no assets the directors are asked to fund the liquidation personally before the practitioner takes the appointment.

On top of the fee are the disbursements: the Gazette notices, the statutory advertising for creditors, and legal fees where the liquidator has to pursue a recovery. A members' voluntary liquidation has fewer of these because there is nothing to pursue.

Ask for the fee in writing before the resolution, ask what it assumes, and ask what is charged if the company turns out to be insolvent and the liquidation converts under section 95. Our own fee for advising the directors alongside the liquidator is agreed in writing before the resolution.

How to choose

The balance sheet chooses. If the company can pay every creditor in full with interest within twelve months, it is a members' voluntary liquidation and the directors sign the declaration. If it cannot, it is a creditors' voluntary liquidation and no declaration is signed. A director who signs the declaration on hope, to get the capital treatment, is committing an offence and will be found out by section 95 within months.

The genuine choice sits one step earlier. A solvent company with under £25,000 to distribute and no complications can be struck off instead, which is covered in our guide to striking off a company. An insolvent company may have a rescue option in administration, a voluntary arrangement or a restructuring plan before liquidation, and those are compared in our guide to the options for a company in financial difficulty. And a company that is solvent today but will not be once its lease ends or its main contract finishes should be liquidated while the declaration can still be signed truthfully, because the tax difference between the two procedures is paid by the shareholders and the timing is in their hands.

Frequently asked questions

What is the difference between an MVL and a CVL?

Solvency. A members' voluntary liquidation is for a company that can pay all its debts in full, with interest, within twelve months; the directors make a statutory declaration to that effect under section 89 of the Insolvency Act 1986 and the shareholders receive the surplus as capital. A creditors' voluntary liquidation is for a company that cannot; no declaration is made, the creditors choose the liquidator, and the liquidator investigates the directors' conduct and reports to the Insolvency Service.

What is a declaration of solvency?

A statutory declaration by the directors, or a majority of them, that they have made a full inquiry into the company's affairs and believe it can pay its debts in full with interest within twelve months of the winding up starting. It must be made in the five weeks before the resolution, include a statement of assets and liabilities, and be filed at Companies House within fifteen days. Making it without reasonable grounds is an offence punishable by imprisonment or a fine.

How is a members' voluntary liquidation taxed?

Distributions by the liquidator are capital, so the shareholder pays capital gains tax on them, where a dividend would have been taxed as income. Where Business Asset Disposal Relief applies, gov.uk states the rate on 22 September 2026 at 18 per cent for disposals from 6 April 2026, up from 14 per cent in 2025-26 and 10 per cent before that, subject to a lifetime limit and qualifying conditions. The anti-avoidance rule in section 396B ITTOIA 2005 taxes the distribution as income if you carry on a similar trade within two years and avoiding income tax was a main purpose.

Who chooses the liquidator in a creditors' voluntary liquidation?

The creditors. The shareholders nominate a liquidator when they pass the resolution, and the directors must then seek the creditors' nomination through a decision procedure, usually deemed consent or a virtual meeting, with a decision date between three business days after notice and fourteen days after the resolution. Under section 100 of the Insolvency Act 1986 the creditors' nominee prevails if it differs, subject to an application to court within seven days.

What do employees get when a company goes into liquidation?

If the company is insolvent, employees claim from the National Insurance Fund through the Redundancy Payments Service: arrears of pay for up to eight weeks, holiday pay for up to six weeks, statutory notice pay and statutory redundancy pay, each capped at £751 a week for redundancies from 6 April 2026. The liquidator provides the case reference and information for the claim. In a members' voluntary liquidation the company pays its employees itself, in full.

Does the liquidator investigate the directors?

In a creditors' voluntary liquidation, yes. Section 7A of the Company Directors Disqualification Act 1986 requires the liquidator to send a conduct report on every director of the last three years to the Secretary of State within three months, which the Insolvency Service uses to decide on disqualification. The liquidator also looks for recoveries: overdrawn loan accounts, preferences, transactions at an undervalue and wrongful trading. In a members' voluntary liquidation there is no conduct report, because the creditors are paid in full.

Can a members' voluntary liquidation turn into a creditors' one?

Yes, under section 95 of the Insolvency Act 1986. If the liquidator forms the view that the company cannot pay its debts in full with interest within the period in the declaration, they must within seven days prepare a statement of affairs, send it to creditors and seek their nomination of a liquidator. The liquidation continues as a creditors' voluntary liquidation, the capital tax treatment is lost, and the directors who signed the declaration face the presumption that they had no reasonable grounds for it.

Sources & further reading

• Insolvency Act 1986, section 89
• Insolvency Act 1986, section 84
• Insolvency Act 1986, section 99
• Insolvency Act 1986, section 100
• GOV.UK: liquidate your company, members' voluntary liquidation
• GOV.UK: Business Asset Disposal Relief
• HMRC Company Taxation Manual CTM36305: distributions in a winding up
• GOV.UK: your rights if your employer is insolvent, what you can get

This article is general information, not legal advice. The law changes and depends on your circumstances — always take advice on your specific situation before acting. Last reviewed 22 September 2026. AD Solicitors Limited is a recognised body regulated by the SRA (no. 8011228).