A Guide to Members Voluntary Liquidation (MVL)

What is a Members Voluntary Liquidation (MVL)?

An MVL is the formal process to bring a solvent company to a close. The process is usually started by the directors but 75% (by value) of the shareholders will need to agree to the resolution to wind the company up.  Once that has happened the company is then dissolved i.e removed from the Companies House register, usually within 12 months.

Who are Members?

The “members” are in effect shareholders. The distinction being that a shareholder can hold shares via a public offering.  So a member is a shareholder in a private company.

When should I use an MVL?

• A company was set up for a specific purpose or contract and that has been completed
• Where the business has become outdated and is now redundant
• Where the directors/owners wish to retire or move overseas and there is no one to take over the running of the business

In such circumstances, a members’ voluntary liquidation may be the answer.

MVLs are only available for solvent companies. The directors are required to make a sworn declaration that the company is solvent and has the ability to pay all of its taxes, creditors, and meet all of its contractual obligations. In other words, the company must not only be able to pay its current liabilities but also be able to pay its future liabilities that have yet to crystallise. This means doing the following;

• Closing the company’s accounts with HMRC by preparing and filing any PAYE/NIC, VAT and Corporation Tax returns.
• Paying any outstanding balances to HMRC.
• Settling any long-term contractual liabilities such as leases and finance agreements.

The directors must be reasonably certain that the company will be able to meet all obligations before proceeding with an MVL

What is the MVL process?

A licensed insolvency practitioner is appointed as liquidator and will realise the company’s assets, settle any legal disputes, and pay any outstanding creditors. They will then distribute the remaining surplus funds to the company’s shareholders/members.

In general terms, the starting point for proceedings with an MVL is that the company must:

• Have completed its business and ceased to trade.
• Have surplus funds left, once all creditors have been paid;
• Have or be in the process of de-registering for VAT, PAYE/NIC and Corporation Tax.
• Have filed, or be in the process of  filing accounts and returns up to the date the business ceased trading.
• Be able to pay any unpaid creditors no longer than within 12 months of the start of a liquidation.

The process is then as follows:

The liquidation itself does not commence until the shareholders pass a resolution to wind-up the company and appoint a Liquidator. Until that time, the company is under the control of the directors. There are, however, a number of formalities to be dealt with before a resolution to wind-up can be passed.

• A directors’ meeting is held to consider the financial position of the company and to agree to place the place the company into Liquidation. A meeting of shareholders is convened to consider the proposed resolution to wind-up. Shareholders must be given written notice of the General Meeting in accordance with the provisions of the company’s Memorandum and Articles of Association (usually 14 days). If, however, more than 90% of the shareholders consent to shorter notice, the meeting may be convened on an earlier date.
• All, or a majority, of the directors need to make a statutory declaration which must be sworn before a solicitor or notary. They have to be sure that the company can pay all of its outstanding debts within 12 months of the date of liquidation.
• The “declaration of solvency” must be made within the 5 weeks prior to the date of the liquidation meeting. We will prepare and issue all the required notices and will assist you and the directors to prepare the above information. We will need the Company to provide us with an unabbreviated set of the last annual accounts prepared and any recent management/draft accounts and a full list of all known creditors.
• At the meeting of shareholders, the shareholders will be asked to consider and pass a resolution to place the company into Liquidation and to appoint Eric Walls and/or Wayne Harrison as liquidator/s.

The resolution to place the company into Liquidation needs to be a Special Resolution and must be supported by at least 75% of the shareholders who attend the meeting and vote. There then follows a simple majority vote to appoint the liquidators.

The Company Is Now In Liquidation and Will Be Wound Up

The liquidator steps are as follows:

• Advertise the appointment in the London Gazette inviting any creditors to make a claim within 21 days.
• Realise the company’s assets.
• Settle any creditor claims.
• Distribute any surplus funds to the shareholders/members.
• Undertake all the necessary paperwork with HMRC and other authorities to complete the closing of the business.
• The company is removed from the Companies House Register.

A company’s assets can be distributed “in specie” to shareholders/members thereby reducing the need for them to be sold.

Any creditor claims paid, after the liquidation commences, will be entitled to receive statutory interest in addition to the amount owed by the company. This is currently 8% and is applied from the date the liquidation commences.

Read our Experts Guide to Members Voluntary Liquidation

Benefits of an MVL?

The primary benefit of a liquidation is to bring a company’s affairs to an orderly closure.  A liquidator deals with the formalities and the company is removed from the companies register or dissolved. In an MVL, the liquidation should also result in an expedient distribution of the surplus funds to the shareholders/members.

In addition, any distribution to the shareholders/members may have certain taxation benefits for them. Dividend distributions in a MVL are usually classified as a Capital distribution, rather than an Income distribution, and would therefore be subject to Capital Gains taxation. Capital Gains has lower taxation rates than Income Tax, especially with the availability of the reduced rate provided by Business Asset Disposal Relief.  However, the availability of any taxation relief will be dependent upon the shareholder’s circumstances and the prevailing taxation criteria at the time of any distribution.

It should be noted that Business Asset Disposal Relief is subject to certain qualifying criteria. You can only claim relief on £1m over your lifetime, i.e sell 2 businesses for £500k in your life.

The main purpose of the liquidation should not solely be for tax benefits. HMRC have Targeted Anti Avoidance Rules (TAAR) that allows it to challenge liquidation shareholder distributions where it considers that the main purpose of the liquidation was to avoid tax. An example of this is where a company is liquidated, and the shareholders decide to start a similar business or trade within a two-years following the liquidation. In these circumstances, HMRC may consider that the main purpose of the liquidation process was to avoid tax. Consequently, HMRC could seek to re-classify any distributions as subject to income rather than capital gains taxation.

In specie distribution

A distribution in kind or “in specie” is when there are assets which cannot easily be realised into cash or where an actual transfer of the asset is more practical. This usually refers to property, land, equipment and stock. The physical assets will be given monetary value after an independent assessment is carried out; allowing the correct tax amounts to be levied and to ensure other shareholders receive a fair distribution which takes this into account.

What Are The Costs Of An MVL?

The cost and disbursements of an MVL depend very much on the work needing to be done. The appointed licensed insolvency practitioner will charge from £3500 +  VAT.  The work needed is the realising of assets, reporting, distribution and associated paper work.

Additional to the liquidation fee there are disbursements. These are smaller costs to pay and are unavoidable. They are known as the third-party costs. Initially, IP will pay for these amounts yet at the end of the process, they are charged back to the client.

Disbursements which are charged include:

• Advertising of the company’s liquidation – this includes the series of four notices; one on appointment, resolution, as a notice for claims and for Scottish registered companies – to be placed in the Gazette, to advertise the company’s solvent liquidation. This is a statutory requirement and fees are to be charged at a cost. It enables other creditors to come forward and claim
• Statutory bond – This is compulsory. Shareholders must take out a bond (varying between £50 and £100+) that provides security, whilst the liquidator takes control of the company. This covers any malpractice. The Bond fee depends on the assets of the company.
• Search fee – this tends to be small.

The insolvency practitioner pays the disbursements when they are needed within an MVL. At the end of the process, they will be charged back to the client.