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Directors’ and Members Responsibilities Prior to Liquidation  

Before placing the company into Members’ Voluntary Liquidation (“MVL”) the board must ensure that final accounts are prepared which clearly set out the closing position regarding assets and liabilities.   

The company may also wish to dispose of any assets which are simple to realise, and ensure that the company’s outstanding debts are paid in full.  By completing these tasks beforehand, the liquidation can proceed quickly, and minimise interest which would otherwise be paid on the company’s debts.   

 

Declaration of Solvency 

Once the director(s) have undertaken a review of the company’s financial position, and are confident that it is solvent, they must prepare a Declaration of Solvency.  This document formally confirms that the company will be able to repay its debts, together with interest, within a period of twelve months, and must be prepared within 5 weeks of the date on which the Shareholders resolve to wind up the company.  

The declaration must be sworn before a solicitor, or commissioner of oaths, and subsequently filed at Companies House. It must be accompanied by a statement of the company’s assets and liabilities, and the directors’ have a responsibility to ensure its accuracy.   

In practice, the director(s) will appoint an IP to assist with preparation of the documentation, and are guided through the entire process.  If a Declaration of Solvency contains false statements, there can be serious repercussions and it is highly advisable to liaise with an experienced insolvency professional from the start of the MVL process.  
Shareholders’ Resolutions to Wind Up

Shareholders’ will be given notice of a general meeting, the purpose of which is for shareholders’ to pass a resolution to place the company into MVL, and appoint a Liquidator.  It is not necessary to seek a decision from the company’s creditors, as the directors’ declare that the company can pay its debts in full.  

Shareholders’ are usually entitled to receive 21 days’ notice of the meeting, although this period can be reduced if not less than 90% of the shareholders’ provide their consent to short notice (or not less than 95% if the company adopted model articles based on the Companies Act 1985). 

Once appointed, the Liquidator will realise remaining assets, settle creditor claims, and distribute the remaining assets to shareholders, in accordance with their individual shares. 

 

Shareholder’s Indemnity  

It is common practice for the Liquidator to request that the Shareholders’ provide an indemnity, to the company and the Liquidator personally.  The indemnity will be limited to the value of the company’s assets, or the funds distributed to the shareholders, whichever is the greater. 

Indemnity is requested from shareholders’ as a precautionary measure. The terms of the indemnity will provide that if funds have been distributed, and claims subsequently arise which were not anticipated, the shareholders’ in receipt of distributions will return these funds to the company so far as is required to settle unforeseen claims, together with accrued statutory interest.   

The provision of indemnity will allow the Liquidator to make advance distributions to shareholders’, if it is prudent to do so.  In practice this means that the Shareholders’ can access funds quickly, and will not have to wait until the administration of the winding-up has concluded.  Without this indemnity, capital distributions will only be paid from surplus funds after the company’s liabilities have been paid in full.  For this reason it is important that the shareholders’ are satisfied as to the accuracy of the Declaration of Solvency presented to them. 

  

Distributions to Shareholders

When the company’s liabilities (and interest) have been settled, the surplus funds will be distributed to shareholders’.  If there is property within the company, which cannot be easily realised, property can be transferred to shareholders rather than a cash distribution on sale.   

The tax implications of distributions should be carefully considered, and specialist advice sought.  

  

Conversation from MVL to Creditors’ Voluntary Liquidation 

If, at any time, the company is unable to pay its liabilities (and interest) in full, the Liquidator must give notice to the company’s creditors’ which will result in conversation of the liquidation to a Creditors’ Voluntary Liquidation (“CVL”), a type of insolvent liquidation.   

Where a MVL is converted to CVL the Liquidator will also need to submit a report to the Department of Trade and Industry in relation to the directors’ conduct.  For further information on the CVL process, see here. 

 

Careful consideration must be given to all options available to a solvent company.  For more advice, fill out our Contact Formand we will be in touch.  Alternatively, call our FREE ADVICE LINE on 0800 781 0990.