If you or your clients are considering a solvent liquidation, we share our top five tips for making the process a smooth one.
A Members’ Voluntary Liquidation is a solvent liquidation, normally chosen where a company has reached the end of its useful life and is no longer required.
There are two key reasons for undertaking a solvent liquidation, rather than opting for the striking-off route:
- Peace of mind, with reduced risk to the board of future personal liability
- Tax efficiency – shareholders will receive capital distributions, which attract much lower tax than income distributions.
Tip 1 for solvent liquidations: Realise assets
Ideally, the asset side of the balance sheet will only comprise cash at bank. Realising assets can be an expensive process, so the less work the liquidator has to do, the lower their fee. If there are intangible assets, such as a loan account, these can be distributed ‘in specie’ (ie a non-cash distribution) to the shareholders. So they may be even easier to realise than cash at bank.
Distributions in specie do not have to involve all shareholders. For example, if the company’s assets comprise cash of £1m and a painting valued at £600,000, and there are two equal shareholders, one may receive cash of £800,000 and the other the painting and cash of £200,000. The members can choose how distributable assets are divided up, as long as they all agree.
Tip 2 for solvent liquidations: Pay all liabilities
This needs to be done in full, so that there are no creditors whatsoever. Creditors’ claims attract statutory interest, currently at 8% pa, and interest runs from the date of liquidation to the date the creditor is paid in full. This is not an immediate process. On appointment a liquidator advertises for claims, in practice giving creditors at least a month to make a claim. If the company disputes a claim, leading to court proceedings, it could be several years before creditors are paid. During this time interest accrues which eventually reduces the amount distributable to members.
Tip 3 for solvent liquidations: Make sure tax affairs are up to date
HMRC recently confirmed that it will no longer provide tax clearance to companies in a solvent liquidation. A liquidator will therefore need copies of all tax returns up to the date trading ceased, together with proof of payment of all liabilities. PAYE schemes should be closed, VAT deregistered and Corporation Tax computations filed. Your accountant can help with all three.
Tip 4 for solvent liquidations: Satisfy all registered charges
A solvent liquidation cannot proceed until all charges have been satisfied at Companies House.
Check the company’s file at https://find-and-update.company-information.service.gov.uk.
Tip 5 for solvent liquidations: Swear the Declaration of Solvency at the right time
The Declaration, which must be made by the majority (if more than two) or all (if two or fewer) of the directors, confirms that the company is solvent and can pay all its claims, plus interest, within 12 months. It needs to be sworn after the board meeting which convenes the meeting of shareholders (at which the company is placed into liquidation) and before the shareholders’ meeting takes place. Every year, in our experience, someone gets it wrong, which both invalidates the liquidation and incurs further cost in having to repeat the process.
