When a company goes into liquidation, it’s not always because of insolvency. There are times when a solvent company opts for liquidation on a voluntary basis. This form of voluntary solvent liquidation is known as a Members’ Voluntary Liquidation (MVL) and is a legal liquidation process to wind up a solvent company.
Why choose a voluntary solvent liquidation?
If a company’s assets or funds outweigh their liabilities, or debts, it is considered a solvent company. A good test is to determine whether the company is able to pay all its creditors, in full, within 12 months of the liability being due.
Just because a company is solvent doesn’t mean that in some cases, it will continue to trade. There are a variety of reasons why the directors and shareholders of a company may choose to enter into an MVL including:
- The company no longer has a purpose, or is no longer needed, but it is rich in assets.
- The directors and shareholders of the company wish to retire, thereby transferring the company’s assets and monies to themselves.
- The directors and shareholders may want to realise any assets, as well as monies, that are tied up in the company and cease their association with the company in the future.
- The directors and shareholders may want to realise assets and monies in the company, closing that business and starting a new company.
What is voluntary solvent liquidation?
When a solvent business wants to close down, it enters into a formal liquidation process known as a Members’ Voluntary Liquidation (MVL). Only a licensed insolvency practitioner may act as liquidator in closing a solvent company.
This type of liquidation is used to realise the assets and extract any remaining monies from the solvent company in a way that abides with tax regulations. The realised funds are then distributed between the directors and shareholders. Voluntary solvent liquidations are a suitable way for dissolving a company but in a more tax-efficient way, particularly if the company’s retained profits are in excess of £25,000.
With an MVL process, any profits that are retained by the company are subject to Capital Gains Tax, including any distribution to directors and shareholders. It is often a cheaper option for directors and shareholders than having dividends. Parties of an MVL may also be eligible for tax benefits, such as Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief. The government scheme reduces the rate of tax a director or shareholder of a company in a voluntary solvent liquidation may have to pay. The recipient, for example, pays a flat CGT rate of 10% on qualifying gains, subject to a lifetime limit of £1 million.
Distribution ‘in specie’
Sometimes, the assets of a solvent company may not be easy to convert into realised funds. Alternatively, a director or shareholder of the company being liquidated may decide to transfer physical goods. This is known as distribution in kind, or ‘in specie’. It usually involves assets that are made up of land or property, unless certain stock or equipment is being transferred.
The physical assets being distributed in specie are assigned a monetary sum that is at current market values, having been assessed by an independent body. This enables the item to be appropriately levied in terms of tax, and makes sure that other directors and shareholders receive a similar level of distribution.
A section 110 arrangement
If a company is undergoing significant restructuring or simplifying a complex corporate structure, the directors and shareholders may use a voluntary solvent liquidation, or MVL, process. This is allowed under section 110 of the Insolvency Act 1986.
A section 110 can also be used if a group wants to close down a solvent subsidiary limited company and transfer that company’s assets to another part of the business. Sometimes this arrangement is used in the cases of divorce or disputes whereby the assets are realised to be distributed to individual shareholders.
As with any formal liquidation process, a licensed insolvency practitioner is appointed. With a voluntary solvent liquidation, the directors will appoint the liquidator.
Once the liquidator has been officially appointed, control of the company is handed over to the liquidator at a directors’ meeting. In most cases, one or more directors remain to work with the liquidator, in a limited capacity, unless there are any disputes between directors and shareholders.
A principal role of the directors is to sign a declaration of solvency. The declaration confirms that the company is able to pay all its debts in full, within 12 months. The formal declaration is sworn on oath by the directors, who must reasonably believe that this is true. If it is found later that this was not the case, the director or directors responsible for the mistruth could face a prison sentence and the liquidation is converted into an insolvent liquidation process.
The shareholder’s role
As a voluntary solvent liquidation, the creditors’ interest is not considered a priority and shareholders of the company are entitled to keep a level of control over the company. Along with the directors, shareholders are also allowed to take part in the choosing of a liquidator.
Once all the debts and any fees have been paid, the shareholders can expect to receive a distribution of the realised funds from the sale of the company’s assets. The monies each shareholder will receive is based on their level of shares held in the company.
When entering a voluntary solvent liquidation, or MVL, a special resolution has to be agreed and passed by the directors and shareholders before the company is officially placed into liquidation. One or more liquidators, who must be a professional insolvency practitioner that is licensed and registered with a recognised authority, will be appointed to wind up the company.
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 0800 246 5895.