Should a solvent limited company wish to liquidate for whatever reason, there is a specific procedure to follow, and that’s a Members Voluntary Liquidation (MVL). It is the process whereby a liquidator is appointed to ensure the company has no outstanding liabilities, and the assets are realised with the funds distributed to the shareholders.
An MVL can only be instigated for a solvent company, i.e. the company has the resources to settle its debts within a 12 month period. In addition, although an MVL is initiated by the directors of the company, 75% of the shareholders must be in agreement with the winding up resolution.
Why choose Members Voluntary Liquidation?
Limited companies can choose the Members Voluntary Liquidation process for a variety of reasons, including:
- To stop trading – for the shareholders, an MVL is the right exit strategy if they are considering releasing their capital in the company and benefiting from tax relief. Realised capital through a Members Voluntary Liquidation process could be more tax-efficient.
- Splitting of company assets – shareholders may want to split the assets of the company through a Section 110 IA86 reorganisation. An MVL could provide the best strategy and the company’s assets would be distributed to benefit shareholders.
- Retirement or moving abroad – shareholders or directors of the company may wish to retire or move abroad.
- Reorganize or restructure a company, or a group of companies – should a company wish to go through a major restructure, or a subsidiary of a group of companies is dormant or sold, an MVL process is a strategic option.
The Members Voluntary Liquidation Process
The main difference between Members Voluntary Liquidation and Company Voluntary Liquidation (CVL) is that an MVL involves a solvent company, and a CVL is for an insolvent company. There are a specific set of steps in the MVL process that the appointed IP, acting as liquidator, must follow.
Step 1 – Directors’ Meeting
The board of directors call a meeting and issue a winding up resolution to liquidate the company. Generally, and depending on the company’s Articles of Association, the meetings can be conducted and resolved by written resolution. At this meeting, an IP is nominated to act as liquidator during the process.
Step 2 – Declaration of Solvency
A Declaration of Solvency statement is prepared that details the company’s liabilities and assets, which is signed by the sole director. If there is more than one director, either two or the majority of directors are required to sign the statement. It must be signed and issued 4-5 weeks before the winding up resolution.
The Declaration sets out the true financial position of the company. There is also a statement of fact from the directors that they have investigated the affairs of the company in full, confirming the company is able to pay their debts, with interest, within 12 months.
Because the Declaration is presented in a specific format, once the liquidator has been appointed, it will be filed with Companies House. Most companies that enter an MVL process have already prepared and finalised their company accounts at this stage.
Step 3 – Shareholders meeting
The winding up resolution notice is distributed to shareholders, either in writing or at a formal meeting. The notice asks the shareholders to vote for or against the proposed closing of the company. It also includes the liquidator’s appointment, costs and expenses, and any agreement with regards to specific assets in specie.
An in specie distribution of assets is usually when there are company assets that can’t be realised easily, or if the directors/shareholders would rather transfer an asset to a new company. The types of assets that come under an in specie distribution include property and/or land, stock and equipment. The assets are valued by an independent party to ensure any relevant tax is correctly allocated. This also means that other shareholders will receive a fair and honest distribution amount.
75% of shareholders must vote for the resolution and once they have been received, the Members Voluntary Liquidation process is official.
Step 4 – The liquidation process
During this stage, the liquidator handles all the necessary documentation and formalities, such as placing an advert in The Gazette, completing and filing the forms for Companies House and HMRC, liaising with all creditors and handling their claims, realising company assets, as well as paying the dividends to creditors.
Step 5 – Deed of Indemnity
Once the winding up resolutions have been agreed, it is possible that the shareholders will want their portion of the distribution of realised assets quickly. The liquidator arranges for Deeds of Indemnity to process these requests.
It is worth noting that Members Voluntary Liquidation distributions could qualify for Business Asset Disposal Relief (formerly known as Entrepreneurs Relief). This is a government scheme which reduces Capital Gains Tax to 10% on any qualifying assets. It is the liquidator’s role to liaise with HMRC to determine if any of the company’s assets qualify and will handle the necessary paperwork.
Step 6 – Converting the process from an MVL to a CVL
Should the situation arise during the Members Voluntary Liquidation process that the company is not actually solvent and can’t pay its debts in full, the company is technically insolvent. At this point, the liquidator calls a creditors’ meeting, under S95 of the Insolvency Act 1986, to convert the MVL into a CVL.
Step 7 – The final meeting
The liquidator will get clearances from HMRC and other government departments of all debts being paid, and ensure that there are no other creditor claims. Once this has been completed, the liquidator informs Companies House that the company has ceased trading and it will be dissolved from the register.
As with most liquidation processes, how long the process takes depends on the company’s circumstances, how complex the case, and with an MVL, how much preparation of the company’s accounts is carried out before the winding up resolution is issued.
Business insolvency is not something that any business 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 to recover. For more information on how our professional insolvency practitioners may be able to help your business, contact us today on 0800 246 5895.