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Members Voluntary Liquidation - What they are and when to use one

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Members Voluntary Liquidation - What they are and when to use one

A Members Voluntary Liquidation (MVL) is a legal process enabling company shareholders to appoint a liquidator to formally shut down - or wind up - a solvent business.

A liquidator will ensure that all assets and liabilities are correctly accounted for and that creditors have been paid off, before issuing a capital distribution to company shareholders, either from funds held within the business or as assets in specie.

Any money that has not been divided up between shareholders by the time the business is removed from the Companies House register, goes to the state.

Whilst an MVL is initiated by the company’s directors, the process still requires at least 75% of shareholders who have been given notice of the meeting of members to pass any winding up resolution.

 

Why might a business enter a Members Voluntary Liquidation?

There are a number of different reasons why a business may decide to place themselves in a Members Voluntary Liquidation, including:

 

The business is winding up and shareholders may be looking to receive a tax-efficient release of their capital using entrepreneurial relief. For many companies, an MVL may offer a favourable exit strategy for the distribution of capital as it could offer more tax benefits compared to distribution via income tax.

The company’s shareholders or directors may be retiring, moving overseas or are an IR35 business that is no longer required as they are moving to full time employment.

MVLs can also be used if a company wishes to restructure. For example, if a subsidiary company is no longer required or has become dormant, it could be used to re-organise a group of companies and shut redundant ones down.

There may be a group of shareholders that wish to split up the company’s assets and an MVL can help facilitate this. Under a section 110 IA86 reorganisation, a company’s assets are distributed to shareholders in specie.

 

 

Statutory declarations of solvency - why they matter

A Members Voluntary Liquidation should only be put into place once all creditors have been paid in full, or are set to be paid in full within one year of the liquidation date.

A statutory declaration of solvency will need to be signed by all directors which warns them that it could be a criminal offence to sign any declaration with the knowledge that any creditors cannot be paid in full within 12 months.

 

Members Voluntary Liquidation - the process

Typically, MVLs take a short amount of time to complete, and no longer than 12 months.

An insolvency practitioner will ask the company directors to submit a balance sheet, or statement of affairs, with the practitioner preparing the rest of the paperwork needed to begin the process. Once this information has been collated, a date is set for the liquidation.

 

It’s a common misconception that you need to hold a creditors meeting in order to enter into a MVL. You don’t. However, a shareholders meeting must be called within at least 14 days notice unless 90% or more of the shareholders have consented already. In these cases, a meeting can be chaired immediately.

Once the liquidation process has begun, the liquidator bears sole responsibility for the company. They will be in charge of the company’s bank account and any assets and agree terms with creditors.

Once any final claims have been settled, the liquidator will split the net assets left in the company between the existing shareholders. Typically, a liquidator will distribute the majority of the money, leaving a small balance to pay upon the closure of the MVL.

On the rare occurrence that an MVL should last over one year and there are still outstanding claims with creditors to be settled, then the process will be converted into a Creditors Voluntary Liquidation. Depending on the circumstances, this can be viewed as a criminal offence and will likely have serious consequences for the directors, including a substantial increase in liquidation costs.

 

Members Voluntary Liquidation - tax savings

When a company is closed using an MVL, any remaining profits in the business are transformed from income into capital. As such, any funds distributed to shareholders are liable for Capital Gains Tax (CGT) as opposed to income tax.

Due to current taxation rates, in the majority of cases, this represents a significantly more favourable option than receiving these funds as dividends.

Because of these tax savings, MVLs are a particularly popular option for businesses entering liquidation with large sums of retained profits.

 

Members Voluntary Liquidation - the costs

Due to the fees involved with hiring a licensed insolvency practitioner, MLVs are more expensive than a simple company strike off, however if your business has a sizeable amount of money to distribute, it is essential that the process is handled in a thorough and transparent manner to avoid any unnecessary costs or HMRC penalties further down the line.

An experienced and knowledgeable insolvency expert will be able to help close down your company in the most efficient manner. At TFMC, our friendly and highly qualified team of legal experts will be able to advise you on the best course of action for your business if you’re currently considering an MVL. Contact us today on 08004704820 or email info@tfmcentre.co.uk to find out more.

 

How do I prepare my company for a Members Voluntary Liquidation?

Before entering a Members Voluntary Liquidation, there are a number of important steps to consider and we strongly recommend that you speak to our legal experts who will be happy to guide you through the process.

Unpaid claims from creditors, including any outstanding payments owed to HMRC, will accrue interest at a rate of 8% once your company enters liquidation, so it is strongly advised that you settle all financial obligations prior to entering an MVL.

Some of the preparatory steps you should take include making sure any outstanding liabilities are paid off, your debtors have settled any payments they may owe you, and all your HMRC accounts and affairs are up to date. We also advise deregistering for VAT and as an employee as soon as your business ceases trading.

Working with your accountant and insolvency practitioner, an MVL should be planned in advance and then actioned as soon as your business is in the right state to do so. Help speed up the process and optimise your business for a Members Voluntary Liquidation by speaking to the team at TFMC today.

 

Want to find out more about Members Voluntary Liquidation (MVL)?

TFMC can help you learn whether a Members Voluntary Liquidation is the right course of action for your business. To find out more please contact us today on 08004704820 or email info@tfmcentre.co.uk to discuss your options with our team of legal experts.