Members Voluntary Liquidation (MVL)

Most companies placed into liquidation are those that have been unsuccessful and can no longer continue. Mainly 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. Alternatively, a creditor will have taken 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 as follows:

• 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• Where the business has become outdated and is now redundant
• Where the directors/owners wish to retire or move overseas 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)?

An MVL is the formal process to bring a solvent company to a close. Note, though initiated by the company’s directors, agreement from 75% of shareholders who have been given notice of the meeting of members to pass the winding-up resolution is required.

A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, settle any legal disputes, and pay any outstanding creditors. They will 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 House register.

When should I use an MVL?

MVLs are only available for solvent companies. 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 also be able to pay its future liabilities that have yet to crystallise. This means doing the following;

• Closing the company’s accounts with HMRC by preparing and filing any PAYE/NIC, VAT and Corporation Tax returns.
• Paying any outstanding balances to HMRC.
• Settling any long-term contractual liabilities such as leases and finance agreements.

The directors must be reasonably certain that the company will be able to meet all obligations before proceeding with an MVL

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 MVL process?

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.
• 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, or be in the process of  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:

The liquidation itself does not commence until such time as the shareholders pass a resolution to wind-up the company and appoint the Liquidator for the purposes of winding up the company’s affairs and distributing its assets. Until that time, the company is under the control of the directors. There are, however, a number of formalities to be dealt with before a resolution to wind-up can be passed.

1. A directors’ meeting is held to consider the financial position of the company and to agree to place the place the company into Liquidation. A meeting of shareholders is convened to consider the proposed resolution to wind-up. Shareholders must be given written notice of the General Meeting in accordance with the provisions of the company’s Memorandum and Articles of Association (usually 14 days). If, however, more than 90% of the shareholders consent to shorter notice, the meeting may be convened on an earlier date.
2.  All or a majority of the directors where there are two or more appointed directors are also obliged to make a statutory declaration to the effect that they have made a full enquiry into the company’s affairs and that, having done so, they have formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months from the commencement of the Liquidation.  This is known as a declaration of solvency and needs to be sworn before a solicitor or notary.
3. The above statement must be made within the 5 weeks immediately preceding the date of the members’ resolution for Liquidation and must contain a statement of the company’s assets and liabilities as at the latest practicable date before the making of the declaration. We will prepare and issue all the required notices and we will assist you and the directors to prepare the above information. We will need the Company to provide us with an unabbreviated set of the last annual accounts prepared and any recent management/draft accounts and a full list of all known creditors.
4. At the meeting of shareholders that is convened, the shareholders will be asked to consider and pass a resolution to place the company into Liquidation and to appointed Eric Walls and/or Wayne Harrison as liquidator/s. The resolution to place the company into Liquidation needs to be a Special Resolution and must be supported by at least 75% of the shareholders who attend the meeting and vote. There then follows a simple majority vote to appoint the liquidators. Once the formalities of the meeting are concluded, the appointment will be published in the London Gazette
5. On the passing of these resolutions, the company is in Liquidation and no longer under the control of the directors
6. The liquidator will realise the company’s assets, settle any creditor claims and distribute any surplus funds to the shareholders/members. A company’s assets can be distributed “in specie” to shareholders/members thereby reducing the need for them to be sold. Any creditor claims 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.

Read our Experts Guide to Members Voluntary Liquidation

Benefits of an MVL?

The primary benefit of a liquidation is to bring a company’s affairs to an orderly closure.  A liquidator deals with the formalities and the company is 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. Capital Gains has lower taxation rates than Income Tax, especially with the availability of the reduced rate provided by Business Asset Disposal Relief.  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.

It should be noted that Business Asset Disposal 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.

The main purpose of the liquidation should not solely be for tax benefits. 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 start a similar business or trade within a two-years following the liquidation. In these circumstances, HMRC may consider that the main purpose of the liquidation process was to avoid tax. Consequently, HMRC could seek to re-classify any distributions as subject to income rather than capital gains taxation.

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 more practical. 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 which takes this into account.

What Are The Costs Of A Members Voluntary Liquidation?

The cost and disbursements of an MVL depend very much on the work needing to be done. The appointed licensed insolvency practitioner will charge from £3500 +  VAT.  The work needed is the realising of assets, reporting, distribution and associated paper work.

However, some smaller costs, will 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 £100 + 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.