What is Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation (“MVL”) is also referred to as ‘solvent liquidation’. The procedure enables shareholders’ to place a solvent company into liquidation in order to realise the assets of the business in order to distribute the surplus proceeds to the company’s members. The process is most often used to wind-down a company which has come to the end of its useful life.
When is an MVL a suitable option?
An MVL will only be suitable for a company which is solvent. The statutory definition of ‘solvent’ is that the company is capable of paying its debts, in full, plus statutory interest, within 12 months of the date of the liquidation.
There are many reasons why a business owner may wish to consider their options and formulate an exit strategy, for example:-
- The business owner may have experienced some change in personal circumstances which renders then unable, or unwilling to continue their involvement in the business;
- The business owner may no longer require the Company as a form of employment, or source of income, or may simply wish to retire from working life;
- A group of Companies might have a subsidiary (or several) which are no longer performing, or which are no longer required in relation to the group strategy.
By creating an exit strategy or a succession plan, the business owner can ensure that they close down the business in the most effective and compliant way.
What does the Liquidator do?
A Liquidator must be a licensed IP. The Liquidator will facilitate a formal wind down of the company, realise assets where necessary, and distribute the funds to the company’s creditors’ and shareholders’, in order of priority. The Liquidator will also prepare and file all of the necessary documentation at Companies House and ensure that the winding up is fully compliant with the current legislation.
Benefits and Risks of an MVL
Under an MVL, the funds extracted from the company will be treated as a capital distribution, which has the effect that taxation will be reduced in comparison to the taxation which would be applied to dividends outside of an MVL procedure (i.e. income distributions).
The funds extracted from the company in MVL will generally be subject to Capital Gains Tax, rather than Income Tax and eligible for Entrepreneurs’ Relief, which could further reduce the taxes owed.
Entrepreneurs’ Relief is available to individuals who are disposing of shares in a trading company, or holding company, or group, in which they hold 5% or more of the voting rights. If Entrepreneur’s Relief is not available an MVL may still provide tax benefits but specialist tax advice should be sought in this instance and any tax implications should be considered in full.
As part of the MVL process, shareholders’ must make a statutory Declaration of Solvency confirming that the directors have conducted a full enquiry into the company’s affairs and are of the opinion that it can repay its debts, with interest, within the required 12 months.
It is extremely important that this declaration is accurate. If at any time the Liquidator is of the opinion that the company will be unable to pay its debts in full (together with interest) then the Liquidator must give notice to the company’s creditors’ which will result in conversation of the liquidation to a Creditors’ Voluntary Liquidation, a type of insolvent liquidation.
For further information on the MVL process, see here.
Careful consideration must be given to all options available to a solvent company. For more advice, fill out our Contact Form and we will be in touch. Alternatively, call our FREE ADVICE LINE on 0800 781 0990.