Members Voluntary Liquidation
The process is most often used to wind-down a company which has come to the end of its useful life
What is Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation (“MVL”) is also referred to as ‘solvent liquidation’. The procedure enables shareholders’ to place a solvent company into liquidation in order to realise the assets of the business in order to distribute the surplus proceeds to the company’s members. The process is most often used to wind-down a company which has come to the end of its useful life.
When is an MVL a suitable option?
An MVL will only be suitable for a company which is solvent. The statutory definition of ‘solvent’ is that the company is capable of paying its debts, in full, plus statutory interest, within 12 months of the date of the liquidation.
There are many reasons why a business owner may wish to consider their options and formulate an exit strategy, for example:-
- The business owner may have experienced some change in personal circumstances which renders then unable, or unwilling to continue their involvement in the business;
- The business owner may no longer require the Company as a form of employment, or source of income, or may simply wish to retire from working life;
- A group of Companies might have a subsidiary (or several) which are no longer performing, or which are no longer required in relation to the group strategy.
By creating an exit strategy or a succession plan, the business owner can ensure that they close down the business in the most effective and compliant way.
What does the Liquidator do?
A Liquidator must be a licensed IP. The Liquidator will facilitate a formal wind down of the company, realise assets where necessary, and distribute the funds to the company’s creditors’ and shareholders’, in order of priority. The Liquidator will also prepare and file all of the necessary documentation at Companies House and ensure that the winding up is fully compliant with the current legislation.
Benefits and Risks of an MVL
The Benefits
Under an MVL, the funds extracted from the company will be treated as a capital distribution, which has the effect that taxation will be reduced in comparison to the taxation which would be applied to dividends outside of an MVL procedure (i.e. income distributions).
The funds extracted from the company in MVL will generally be subject to Capital Gains Tax, rather than Income Tax and eligible for Entrepreneurs’ Relief, which could further reduce the taxes owed.
Entrepreneurs’ Relief is available to individuals who are disposing of shares in a trading company, or holding company, or group, in which they hold 5% or more of the voting rights. If Entrepreneur’s Relief is not available an MVL may still provide tax benefits but specialist tax advice should be sought in this instance and any tax implications should be considered in full.
The Risks
As part of the MVL process, shareholders’ must make a statutory Declaration of Solvency confirming that the directors have conducted a full enquiry into the company’s affairs and are of the opinion that it can repay its debts, with interest, within the required 12 months.
It is extremely important that this declaration is accurate. If at any time the Liquidator is of the opinion that the company will be unable to pay its debts in full (together with interest) then the Liquidator must give notice to the company’s creditors’ which will result in conversation of the liquidation to a Creditors’ Voluntary Liquidation, a type of insolvent liquidation.
Careful consideration must be given to all options available to a solvent company. For more advice, fill out our contact form and we will be in touch.
The MVL Process
Directors’ and Members Responsibilities Prior to Liquidation
Before placing the company into Members’ Voluntary Liquidation (“MVL”) the board must ensure that final accounts are prepared which clearly set out the closing position regarding assets and liabilities.
The company may also wish to dispose of any assets which are simple to realise, and ensure that the company’s outstanding debts are paid in full. By completing these tasks beforehand, the liquidation can proceed quickly, and minimise interest which would otherwise be paid on the company’s debts.
Declaration of Solvency
Once the director(s) have undertaken a review of the company’s financial position, and are confident that it is solvent, they must prepare a Declaration of Solvency. This document formally confirms that the company will be able to repay its debts, together with interest, within a period of twelve months, and must be prepared within 5 weeks of the date on which the Shareholders resolve to wind up the company.
The declaration must be sworn before a solicitor, or commissioner of oaths, and subsequently filed at Companies House. It must be accompanied by a statement of the company’s assets and liabilities, and the directors’ have a responsibility to ensure its accuracy.
In practice, the director(s) will appoint an IP to assist with preparation of the documentation, and are guided through the entire process. If a Declaration of Solvency contains false statements, there can be serious repercussions and it is highly advisable to liaise with an experienced insolvency professional from the start of the MVL process.
Shareholders’ Resolutions to Wind Up
Shareholders’ will be given notice of a general meeting, the purpose of which is for shareholders’ to pass a resolution to place the company into MVL, and appoint a Liquidator. It is not necessary to seek a decision from the company’s creditors, as the directors’ declare that the company can pay its debts in full.
Shareholders’ are usually entitled to receive 21 days’ notice of the meeting, although this period can be reduced if not less than 90% of the shareholders’ provide their consent to short notice (or not less than 95% if the company adopted model articles based on the Companies Act 1985).
Once appointed, the Liquidator will realise remaining assets, settle creditor claims, and distribute the remaining assets to shareholders, in accordance with their individual shares.
Shareholder’s Indemnity
It is common practice for the Liquidator to request that the Shareholders’ provide an indemnity, to the company and the Liquidator personally. The indemnity will be limited to the value of the company’s assets, or the funds distributed to the shareholders, whichever is the greater.
Indemnity is requested from shareholders’ as a precautionary measure. The terms of the indemnity will provide that if funds have been distributed, and claims subsequently arise which were not anticipated, the shareholders’ in receipt of distributions will return these funds to the company so far as is required to settle unforeseen claims, together with accrued statutory interest.
The provision of indemnity will allow the Liquidator to make advance distributions to shareholders’, if it is prudent to do so. In practice this means that the Shareholders’ can access funds quickly, and will not have to wait until the administration of the winding-up has concluded. Without this indemnity, capital distributions will only be paid from surplus funds after the company’s liabilities have been paid in full. For this reason it is important that the shareholders’ are satisfied as to the accuracy of the Declaration of Solvency presented to them.
Distributions to Shareholders
When the company’s liabilities (and interest) have been settled, the surplus funds will be distributed to shareholders’. If there is property within the company, which cannot be easily realised, property can be transferred to shareholders rather than a cash distribution on sale.
The tax implications of distributions should be carefully considered, and specialist advice sought.
Conversation from MVL to Creditors’ Voluntary Liquidation
If, at any time, the company is unable to pay its liabilities (and interest) in full, the Liquidator must give notice to the company’s creditors’ which will result in conversation of the liquidation to a Creditors’ Voluntary Liquidation (“CVL”), a type of insolvent liquidation.
Where a MVL is converted to CVL the Liquidator will also need to submit a report to the Department of Trade and Industry in relation to the directors’ conduct.
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We had never heard of a CVA and had concluded that the only solution was cessation of trade. The Business Debt Advisor talked us through all the possible solutions and we were quite simply amazed that creditors would accept less than payment in full. The initial period of trading after the CVA was approved was initially tough as certain creditors would only trade on a pro-forma basis but once they realised the business was not going to fold, we were able to trade on normal credit terms. The team at The Business Debt Advisor were extremely professional and we are delighted with the outcome especially as they kept their costs to a minimum.