A solvent liquidation (Members Voluntary Liquidation or MVL) is a method of winding down a company which has ceased to trade but is still solvent. This means that all creditors have been or will be repaid in full, and there are surplus funds to return to the shareholders.
The main advantage of an MVL is that it can be a highly tax efficient method for shareholders to be repaid their capital from a dormant business, because all distributions made in the liquidation are treated as capital gains rather than income. Capital gains treatment should lead to much lower tax liabilities than the equivalent dividends, especially if Entrepreneurs Relief also applies.
In addition to tax advantages an MVL also provides more finality compared to a striking off. Because the liquidator must follow a formal procedure to identify potential creditor claims, the prospect of claims arising in the future and leading to complications is much reduced.
What is the process to begin an MVL?
First, the company must appoint a licensed Insolvency Practitioner (IP) who will assist in placing the company into MVL and ultimately become the liquidator. Prior to the liquidation commencing the IP will assist with the following procedural steps.
- The Directors make a “Statutory Declaration of Solvency” stating that the company can pay all its debts within no more than 12 months. It is important that a thorough assessment of the Company’s financial position is undertaken before this is done – making a false declaration is an offense which can result in a fine or imprisonment or both.
- A board meeting is held at which the directors must agree to proceed with a liquidation and to call a shareholders meeting.
- A shareholders meeting is then convened where the shareholders must pass a resolution to place the company into liquidation, at which point the liquidation process begins.
- The liquidator then files statutory papers and advertises the appointment of liquidators in the London/Edinburgh Gazette. The liquidator also takes steps to ascertain and settle any liabilities.
What happens after an MVL is approved?
The liquidator has three main functions:
- Realise assets: In most cases we advise directors to carry out all asset sales / collection of debtors before the liquidation begins. This means that the liquidator only has to deal with cash held in the company’s bank accounts, which reduces the cost of the process.
- Identify and settle valid creditor claims: The liquidator must contact any known creditors directly and also advertise for creditor claims in the London Gazette. Any valid claims must be paid in full by the liquidator. Again we usually advise directors to settle all creditors prior to the liquidation to reduce costs.
- Distribute surplus funds/assets to shareholders. The majority of these surplus funds can usually be distributed within four to six weeks of the liquidation commencing with the rest being paid after HMRC have given tax clearance. If the shareholders are willing to give an indemnity to the liquidators (which means they would pay any distributions back if unexpected creditor claims arise) they can receive their funds almost immediately.
The most important part of an MVL is getting formal clearance from HM Revenue & Customs in relation to PAYE, VAT and Corporation Tax. This means that they are satisfied all financial matters are concluded and no further queries can be raised in the future.
Once all creditors are paid and assets distributed the liquidation is completed and the company is struck off the register of companies.What is the process to begin an MVL?
