In some situations, the directors of a solvent limited company may want to close the business. For example, it may be for tax reasons, the company may be part of a larger business and is no longer required, or the directors may simply wish to retire and there is nobody to take over the business. Whatever the reason, the directors can choose to enter a Members’ Voluntary Liquidation process.
Is a Members’ Voluntary Liquidation process right for your company?
A solvent company enters into an MVL for a variety of reasons, including:
- The directors and shareholders want to retire, transferring the assets and monies to them personally and closing the company
- The company is part of an umbrella business and is no longer required
- The directors wish to close the company, realise the assets and start a new company
- The directors and shareholders decide to close the company for tax reasons. The two main tax advantages are Capital Gains Tax (CGT) and the MVL Entrepreneurs Relief, which is now known as Business Asset Disposal Relief.
With CGT, currently the annual exemption is £12,000. Therefore any capital to the point of £12,000 is subject to 0% tax.
For Business Asset Disposal Relief, there is a strict criteria that shareholders must meet in order to qualify for the relief tax:
- A shareholder must hold a minimum of 5% of the company’s shares
- A shareholder must hold the position of company director
- A shareholder must have owned their percentage of shares for at least 12 months
- The company must have been trading The Members’ Voluntary Liquidation process must be completed within 36 months of the company ceasing to trade
The current lifetime limit for Business Asset Disposal Relief is £10 million.
Another advantage to an MVL is that shareholders can be paid using assets, such as land, bonds or property, rather than cash, either from the company’s reserves or realised assets. This is known as distributions in species.
There are certain criteria to be met in order to enter a Members’ Voluntary Liquidation process. The company’s financial information must be up-to-date in order to prepare the required Declaration of Solvency. All the directors of the company must agree to an MVL and sign the Declaration.
What is the Members’ Voluntary Liquidation process?
Once the company has proven to be solvent and the directors, and shareholders, have agreed to an MVL, an insolvency practitioner (IP) is appointed as liquidator to handle the MVL process. A series of steps that must be adhered to are taken by the IP.
Step 1 – Declaration of Solvency
The IP and directors prepare the final company financial statement and Declaration of Solvency. This must be done before the MVL can go ahead. It declares that the company is able to repay all its debts, as well as contingent liabilities, within 12 months of the Declaration’s date. All creditors are informed of the intention to close the company. Sometimes, unexpected claims arise at this point. This may determine whether the company is solvent or not.
Depending on the size of the company all or some of the directors sign the Declaration which is then filed with Companies House by the IP.
Step 2 – The shareholders’ meeting
The directors will either convene a shareholders’ meeting (currently this is done remotely) or send a written resolution to the shareholders’ informing them of the intended company closure and their reasons.
At least 75% of the shareholders’ must agree to the MVL within 5 weeks from the Declaration of Solvency being filed with Companies House. In addition, the resolution is advertised in the London Gazette within 14 days. The London Gazette is the UK’s official public record and notifies of the intention to close the company.
Once agreed by the shareholders’, the IP also officially notifies creditors of the intended company closure within 28 days. They can proceed with the Members’ Voluntary Liquidation process.
Step 3 – Liquidating the business
The appointed liquidator officially starts the Members’ Voluntary Liquidation process. The company’s remaining assets are valued and sold at market price by the liquidator and any creditors that remain are paid in full from the company’s cash reserves or realised assets.
The remaining funds are distributed to shareholders of the company by the liquidator. All distributions are taxed as capital instead of income in an MVL. Shareholders that qualify for Business Asset Disposal Relief can effectively reduce the rate of tax even further to 10% once the company has been closed.
Step 4 – Removing the company from Companies House’s Register
Once the liquidation process has been completed and realised assets, as well as remaining funds, have been distributed, the liquidator obtains final clearance from HMRC. At this point, most liquidators convene a final meeting, albeit currently on a remote basis, with shareholders.
The final documentation is filed with Companies House and a second notice is placed in the London Gazette to confirm the company is now closed. Within a 3 month period, it will be removed from the Register at Companies House and the company will no longer exist.
The timeline to complete a Members’ Voluntary Liquidation process varies depending on the size of the company, the number of shareholders and the value of any assets. For example, if the company has assets that exceed £25,000 in value, it will take longer.
As the Declaration of Solvency declares that the company is able to pay all its debts in full within 12 months, an MVL will not take longer than this period. In general, most Members’ Voluntary Liquidation processes take 3-6 months to finalise and cease to exist on the Companies House Register.
If you are considering closing a solvent company using a Members’ Voluntary Liquidation process, contact Simple Liquidation for assistance. Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 246 5895