Members Voluntary Liquidation MVL
Most companies that are placed into liquidation are those that have been unsuccessful and can no longer continue because they are unable to pay the monies that they owe to creditors. In these circumstances, the directors and shareholders will place the company into voluntary liquidation, or a creditor will take legal proceedings to have the company wound up.
However, the liquidation process can also be used to bring a company to a close when it is not in financial distress. There may come a time when a company has come to the end of its life and the directors and shareholders wish to close the business and formally wind up its affairs. Examples of when a company has reached the end of its life are where a company was set up for a specific purpose or contract and that has been completed, where the business has become outdated and is now redundant and where the directors/owners wish to retire and there is no one to take over the running of the business.
In such circumstances, a members’ voluntary liquidation may be the answer.
What is a Members Voluntary Liquidation (MVL)?
A MVL is the formal process to bring a solvent company to a close. A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, settle any legal disputes and pay any outstanding creditors and then distribute the remaining surplus funds to the company’s shareholders/members. In a MVL, the company must have paid or be able to pay all of its creditors and contractual liabilities. Once the liquidator has completed these formalities and received clearance from HMRC, the company will be dissolved and formally removed from the companies register.
When should I use an MVL?
MVLs are only available for solvent companies and the directors are required to make a sworn declaration that the company is solvent and has the ability to pay all of its taxes, creditors and meet all of its contractual obligations. In other words, the company must not only be able to pay its current liabilities but must also be able to pay its future liabilities that have yet to crystallise. These will normally include closing the company’s accounts with HMRC by preparing and filing any PAYE/NIC, VAT and Corporation Tax returns and paying any outstanding balance. It may also include settling any long-term contractual liabilities such as leases and finance agreements.
The directors must therefore be reasonably certain that the company will be able to meet all obligations before proceeding with a MVL and convening a shareholders/members’ meeting to appoint a liquidator.
Section 110 scheme of arrangement MVLs
Though most MVLs are used as exit tools for companies, they can also be used by companies with complex corporate structures looking to restructure or simplify itself. This is permitted by Section 110 of the insolvency act 1986.
MVLs can also be used as a tool to demerger or divide a company i.e. distribute shares in a company to individual shareholders or transfer assets around the business. When used in this way, it is referred to as a ‘restructuring MVL’.
What is the process and how can one be arranged?
Only a licensed Insolvency Practitioner can be appointed as a liquidator and you will need to speak to one who will explain and guide you through the process. In general terms, the starting point for proceedings with an MVL is that the company must:
- Have completed its business and ceased to trade and have or be anticipated to have surplus funds left once all creditors have been paid;
- Have or be in the process of de-registering for VAT, PAYE/NIC and Corporation Tax.
- Have filed to be in the process of completing and filing accounts and returns up to the date the business ceased trading
- Be able to pay any unpaid creditors no longer than within 12 months of the start of a liquidation.
The process is then as follows:
- Declaration of solvency: the directors prepare make a statutory declaration that the company is solvent. To do this, a closing financial statement must be prepared, and it must be sworn before a solicitor or notary. Where the company has more than one director the statement must be sworn by all or a majority if the directors.
- Shareholders meeting: once the statement has been sworn by the directors and within five weeks of the declaration, a meeting of the company’s shareholders must be held. At this meeting the shareholders/members will be asked to pass a resolution to agree to the company being placed into liquidation and to appoint a liquidator.
- Published in the London Gazette: as mentioned, the appointed liquidator must be a licensed insolvency practitioner. Once the formalities of the meeting are concluded, the appointment will be published in the London Gazette
- Realising the assets: at this stage, the liquidator takes control of the company and the directors’ powers are curtailed. The liquidator will realise the company’s assets, settle any creditor claims and distribute any surplus funds to the shareholders/members.
- Distributing the assets: a company’s assets can be distributed in specie to shareholders/members thereby alleviating the need for them to be sold.
- Any creditor claims that are paid after the liquidation commences will be entitled to receive statutory interest in addition to the amount owed by the company. This is currently 8% and is applied from the date the liquidation commences.
Benefits of a MVL?
The primary benefit of a liquidation is to bring a company’s affairs to an orderly closure, to appoint a liquidator to deal with the formalities and for the company to be removed from the companies register or dissolved. In an MVL, the liquidation should also result in an expedient distribution of the surplus funds to the shareholders/members.
In addition, any distribution to the shareholders/members may have certain taxation benefits for them. Dividend distributions in a MVL are usually classified as a Capital distribution rather than an Income distribution and would therefore be subject to Capital Gains taxation. This has lower taxation rates than income tax especially with the availability of the reduced rate provided by Entrepreneur’s Relief.
It should be noted that Entrepreneur’s Relief is subject to certain qualifying criteria. You can only claim relief on £1m over your lifetime, i.e sell 2 businesses for £500k in your life. This is going to be replaced by what is called Business Asset Disposal Relief in April 2021.
Whilst it may have taxation benefits for shareholders/members, the main purpose of the liquidation should not solely be for this purpose. Indeed, HMRC have Targeted Anti Avoidance Rules (TAAR) that allows it to challenge liquidation shareholder distributions where it considers that the main purpose of the liquidation was to avoid tax. An example of this is where a company is liquidated, and the shareholders decide to recommence a similar business or trade one or within a two-year period following the liquidation. In these circumstances, HMRC may consider that the main purpose of the liquidation process was to avoid tax and it could seek to re-classify any distributions as subject to income rather than capital gains taxation.
A MVL is the formal process for bringing a company’s affairs to a close. It is overseen by a licensed insolvency practitioner appointed by the members and who will oversee the process. Ultimately, the company will be dissolved and removed from the companies register once the liquidation process is complete. It may also provide certain taxation benefits for the members. However, the availability of any taxation relief will be dependent upon the shareholder’s circumstances and the prevailing taxation criteria at the time of any distribution.
In specie distribution
A distribution in kind or "in specie" is when there are assets which cannot easily be realised into cash or where an actual transfer of the asset is preferred. This usually refers to property, land, equipment and stock. The physical assets will be given monetary value after an independent assessment is carried out; allowing the correct tax amounts to be levied and to ensure other shareholders receive a fair distribution amount which takes this into account.
The main cost of an MVL
The cost and disbursements attached. The main cost is that for entering the MVL and is charged by the appointed licensed insolvency practitioner.
However, smaller costs, the disbursements cover the cost of any legal notices you are required to take out on your company’s behalf i.e. the three adverts placed in the Gazette (around £87 + VAT each) and payment for a bond. A bond ensures you are protected whilst the company’s funds are in the hands of the insolvency practitioner. The amount the bond is for depends on the asset value of the company and the bond provider used.
The author of this page is Wayne Harrison Licensed Insolvency Practitioner
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.