Members Voluntary Liquidation
Closing a company can be a complex and daunting process. However, did you know that if your company is solvent, there is a tax-efficient and legally compliant way to wind it up?
Introducing Members Voluntary Liquidation (MVL), a procedure that can provide significant tax benefits and a smooth exit for business owners.
In this blog post, we will guide you through the ins and outs of MVL, its advantages, and how it compares to other liquidation processes.
- Members’ Voluntary Liquidation (MVL) is a formal process to dissolve solvent companies, providing tax benefits such as Capital Gains Tax and Business Asset Disposal Relief.
- Different processes for distributing profits to shareholders of solvent companies and allocating assets to creditors in insolvent ones.
- Tips for successful MVL include preparation, asset valuation, paying debts & keeping stakeholders informed throughout the process.
Demystifying Members Voluntary Liquidation (MVL)
MVL stands for Members Voluntary Liquidation. It is used to dissolve a solvent company in a formal process.
It involves company members and an appointed licensed insolvency practitioner, who will settle outstanding debts, and legal disputes, and pay creditors through profits and sale of assets.
The remaining funds are then distributed to members as capital instead of income, providing tax benefits to eligible individuals such as capital gains tax and business asset disposal relief (formerly known as Entrepreneurs Relief).
But what makes a company eligible for MVL, and how does the process work?
Solvent Company Criteria
A company is considered solvent if it has sufficient assets to cover its liabilities and can satisfy all its financial obligations.
To be eligible for MVL, a company must have more than £25,000 in cash or asset reserves after settling all creditors, have no outstanding legal disputes, and be prepared to enter insolvency.
If a company does not meet these criteria, alternatives such as Creditors’ Voluntary Liquidation (CVL) or Administration may be more suitable.
Before starting the MVL process, the company directors must sign a Declaration of Solvency, a formal statement of assets and liabilities indicating the company’s financial stability.
This ensures that the company has the means to fully repay all creditors and make a fair distribution to all its creditors and shareholders.
Role of Licensed Insolvency Practitioner
In an MVL, a licensed insolvency practitioner (IP) plays a crucial role, as they are the only person who can be appointed as a liquidator.
The company and liquidator company is appointed by the company’s other directors and the company and shareholders and the company is responsible for overseeing the company and entire company MVL process.
The liquidator will advertise for additional claims following their appointment. Creditors must submit the relevant details within 21 days of the advertisement.
They will work to clear any existing debts and resolve legal conflicts. Creditors will receive payment by using the company’s profits and from selling its assets.
Finally, they will distribute the remaining surplus funds to the members as capital, ensuring a tax-efficient and fair conclusion to the company’s affairs.
MVL vs. CVL: Key Differences
At this point, you may be wondering how MVL compares to other liquidation processes, such as Creditor’s Voluntary Liquidation (CVL).
The primary distinction between MVL and CVL lies in the purpose and eligibility of each process.
While MVL is utilized for solvent companies to distribute profits to shareholders, CVL is employed to close down insolvent companies and allocate the remaining assets to creditors.
Let’s dive deeper into these differences.
Purpose and Eligibility
MVL is designed to facilitate the closure of a solvent company in a tax-efficient way, allowing shareholders to receive their share of the company’s assets as capital rather than income.
This means that the distributions are subject to capital gains tax, which typically has lower tax rates than income tax, especially with the availability of Entrepreneurs Relief.
On the other hand, CVL is used to bring an insolvent company to a close, with the remaining assets distributed to creditors in a specific order of priority.
In this case, the company does not have sufficient assets to fully repay all its debts to creditors, and therefore, the process focuses on maximizing returns for the creditors rather than shareholders.
Distribution of Assets
The appointed insolvency practitioner will settle any unpaid debts and legal disputes in a member’s Voluntary Liquidation.
They will pay the creditors through the sale of assets and profits generated from the company. Subsequently, the remaining surplus funds of a solvent limited company will be allocated to the members as capital rather than income, thus incurring preferential personal tax rates.
In contrast, CVL involves the distribution of assets in a different order of priority: first to secured creditors (such as banks), then to priority unsecured creditors (such as employees), and finally to the remaining creditors before any equity shareholders.
This process is primarily focused on ensuring that creditors are repaid as much as possible, rather than maximizing returns for shareholders.
The MVL Process: Step-by-Step Guide
Now that we’ve covered the basics of MVL and its comparison to CVL, let’s explore the MVL process in more detail.
To initiate the process, the company must first meet certain criteria, including having more than £25,000 in cash or asset reserves after paying all creditors, no legal disputes, and being ready for insolvency.
Initiating the Process
The MVL process begins with the company directors passing a resolution to initiate the liquidation.
Next, a liquidator will be appointed, typically a licensed insolvency practitioner, to oversee the process and handle the company’s assets.
The already appointed liquidator will compile a statement of affairs, which includes a register of assets and liabilities, and will then assess the statement of affairs with the company’s directors and shareholders to ensure accuracy.
A Declaration of Solvency, a formal statement of the company’s assets and liabilities, is essential for any liquidator.
It must be signed by the sole director, or by the majority of directors if there is no more than one director, three directors, one director or two directors.
This declaration must be made within five weeks of the winding-up resolution being passed.
Asset Distribution and Settlement
An insolvency practitioner will be appointed to take control of the situation. 2. They will settle outstanding debts, legal disputes and pay creditors through profits arising from asset sales.
They will also advertise for any additional claims, providing creditors with a minimum of 21 days to submit details.
After this period, the liquidator will distribute the remaining funds to shareholders as capital, ensuring a tax-efficient and fair conclusion to the company’s affairs.
It is crucial for the liquidator to obtain tax clearance from HMRC before finalizing the MVL process. Once clearance is received, the company can then be dissolved and removed from Companies House.
Finalizing and Dissolving the Company
In the final stages of the MVL process, the liquidator will call a final meeting of shareholders to dissolve the company.
This meeting is an opportunity for shareholders to ask any remaining questions and voice any concerns before the company is officially dissolved.
Upon successful completion of the MVL process and obtaining tax clearance from the Revenue Commissioners, the company will be dissolved and removed from Companies House.
With the company now officially closed, the shareholders can move forward with the knowledge that in most companies their assets have been distributed in a tax-efficient and legally compliant manner.
Tax Efficiency and Benefits of MVL
One of the main advantages of choosing MVL for closing a solvent company is its tax efficiency for capital distribution company shareholders.
Shareholder distributions are treated as capital, incurring a lower tax rate than conventional dividends.
Moreover, Entrepreneurs Relief, a government scheme for reduced Capital Gains Tax, can further increase the tax benefits for qualifying shareholders of limited companies.
Capital Gains Tax Advantages
Capital Gains. Tax is charged on the profit generated from the sale of certain assets, such as stocks, bonds, and real estate.
In an MVL, shareholder distributions are considered capital distributions, subject to Capital Gains Taxation, which has lower tax rates than income tax.
This makes MVL an attractive option for business owners looking to close their companies with minimal tax implications.
Entrepreneurs Relief is a government scheme that offers a reduced Capital Gains Tax rate of 10% on all qualifying assets.
When combined with the tax-efficient nature of MVL, Entrepreneurs Relief can result in a tax-efficient process and in substantial savings for shareholders.
Business Asset Disposal Relief
Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs Relief, is a tax relief scheme that can reduce the applicable Capital Gains.
Tax rate upon the sale or liquidation of an insolvent, company assets or assets of a solvent company.
BADR is available to companies that go into liquidation through a solvent company liquidation process, such a simple process as the liquidation of company assets through an MVL.
By qualifying for BADR, shareholders can benefit from a reduced Capital Gains Tax rate of 10% on all qualifying assets.
This additional tax benefit, combined with the inherent tax efficiency of MVL, makes the process even more appealing to business owners seeking a cost-effective and tax-efficient way to close their companies.
Timeframe and Costs of MVL
The timeframe for an MVL can vary, typically taking between six months and a year to complete.
Factors such as the complexity of the company’s affairs, delays from HMRC, and the efficiency of the liquidator can all impact the timeline.
Accountants and directors can expedite the process by ensuring that all necessary documentation is prepared and submitted promptly.
Although the overall timeframe for MVL can range from as little as 21 days to distribute company assets to shareholders, the time estimated for case closure and subsequent dissolution is more uncertain, as it is dependent upon HMRC clearance.
Historically, it has been estimated to take three months from appointment, although recently it has taken longer.
To minimize delays and ensure a smooth MVL process, it is crucial for accountants, directors, and the liquidator to work together and communicate effectively.
This includes preparing and submitting necessary documentation promptly and addressing any issues that may arise during the process.
The costs associated with an MVL include the insolvency practitioner’s fee and disbursements, which are estimated to be in the range of £3,000+VAT and disbursements.
These disbursements must be paid to provide potential creditors with an opportunity to submit their claim, as well as for the placement of three Statutory Adverts in the London Gazette and a compulsory bond.
While the costs of MVL may seem significant, it’s important to consider the potential tax savings and long-term benefits of choosing this process.
The tax-efficient distribution of assets and potential eligibility for Business Asset Disposal Relief can result in substantial savings for shareholders, making MVL a worthwhile investment for closing a solvent company.
Tips for a Smooth MVL Process
To ensure a smooth and efficient MVL process, it’s essential to be well-prepared and proactive. This includes conducting a thorough asset valuation, paying all outstanding debts, agreeing on final accounts with the liquidator, and keeping shareholders informed throughout the process.
It is important to ensure that all stakeholders are kept up to date with the progress of the MVL process.
This includes providing regular updates on the progress of the own member’s voluntary liquidation process, as well as any other updates on the progress of the other member’s voluntary liquidation process.
Preparing Necessary Documentation
Before initiating the MVL process, it is crucial to prepare all necessary documentation, such as a statutory declaration of solvency and an updated list of the company’s assets and liabilities.
This ensures that the monetary value of the company’s financial position contingent liabilities is accurately reflected and that all creditors are adequately compensated.
Obtaining a Declaration of Solvency is essential. It is a formal statement of the company’s assets and liabilities, signed either by the sole director or by the majority of directors if there are more than two.
This declaration must be made within five weeks of the winding-up resolution being passed, further emphasising the importance of thorough preparation and timely submission of documentation.
Communicating with Shareholders
Effective communication with shareholders is paramount during the MVL process. It is essential to keep them informed of the progress, provide them with the necessary documents, and address any questions or concerns they may have.
By maintaining transparency, promptness, and empathy in communication, shareholders will feel more at ease and involved in the process, ultimately contributing to a smoother and more successful MVL outcome.
In conclusion, Members Voluntary Liquidation (MVL) offers a tax-efficient and legally compliant way for solvent companies to close their business.
By understanding eligibility criteria, the role of the licensed insolvency practitioner, and the process itself, business owners can navigate the MVL journey with confidence.
With thorough preparation, effective communication, and the guidance of an experienced insolvency practitioner, shareholders can reap the benefits of a new venture with MVL and move forward to new ventures with peace of mind.
Frequently Asked Questions
What happens in a member’s voluntary liquidation?
In a Members Voluntary Liquidation, the members of a solvent company appoint a qualified Insolvency Practitioner to act as a liquidator.
The IP will settle outstanding debts, and legal disputes and pay creditors through profits and the sale of assets, before finally dissolving the company.
Once all payments have been made, any remaining money is then distributed to shareholders.
What is the difference between CVL and MVL?
The primary difference between CVL and MVL is the financial state of the company:
A CVL is used for insolvent companies that cannot pay their debts, while an MVL is used by solvent companies with enough assets to meet their contractual obligations themselves.
Who is eligible for MVL?
MVLs are suitable for solvent companies that wish to close their business as quickly and cost-effectively as possible.
To be eligible, the company must be able to pay its liabilities in full within 12 months.
If your company is insolvent, other options such as a Creditors’ Voluntary Liquidation (CVL) or Administration may be more appropriate.
What is an example of voluntary liquidation of members?
Voluntary or compulsory liquidation of members is when a company’s shareholders choose to wind down their business, with the remaining assets distributed amongst the owners or stakeholders. This can be an attractive option in situations where there are debts to be settled and profits have declined significantly.
For example, a limited liability company may decide to dissolve in order to avoid any further losses.
Information For Company Directors
Here are some other informative articles for company directors in the UK:
- Advantages and Disadvantages of Creditors Voluntary Liquidation
- Can a company be reinstated after liquidation?
- Can HMRC Liquidate A Company?
- Can I Adjourn Or Stop A Winding-Up Petition?
- Can I Liquidate My Company and Start Again?
- Can You Liquidate a Company For Free?
- Checklist for Creditors Voluntary Liquidation
- Company Is Facing A Winding Up Petition
- Company Liquidation
- Compulsory Liquidation
- Creditors Voluntary Liquidation (CVL)
- Do I Need To Use An Insolvency Practitioner To Liquidate?
- How Can I Find a Local Insolvency Practitioner
- How Can I Stop A Creditor Putting My Company into Liquidation
- How Do I Know When It’s Time to Liquidate My Company
- How to Find a Liquidator Near Me
- I Want to Liquidate My Business: What is the Process?
- Liquidating a Company with Outstanding Personal Guarantees
- My Company Has Been Issued with a Statutory Demand
- Understanding Freezing Orders for Company Directors
- Understanding Members Voluntary Liquidation
- What are the Three Different Types of Liquidation
- What Happens if My Business Receives a CCJ
- What Happens to My Overdrawn Director’s Loan Account in Liquidation?
- What is a Winding Up Order and Can It Be Challenged?
- What is Company Liquidation?
- What is Express Liquidation?
- What is the Role of the Official Receiver in a Liquidation?
Areas We Cover
- Members Voluntary Liquidation Greater London
- Members Voluntary Liquidation Essex
- Members Voluntary Liquidation Hertfordshire
- Members Voluntary Liquidation Kent
- Members Voluntary Liquidation Surrey
- Members Voluntary Liquidation Bedfordshire
- Members Voluntary Liquidation Buckinghamshire
- Members Voluntary Liquidation Berkshire
- Members Voluntary Liquidation Cambridgeshire
- Members Voluntary Liquidation East Sussex
- Members Voluntary Liquidation Hampshire
- Members Voluntary Liquidation West Sussex
- Members Voluntary Liquidation Suffolk
- Members Voluntary Liquidation Oxfordshire
- Members Voluntary Liquidation Northamptonshire
- Members Voluntary Liquidation Wiltshire
- Members Voluntary Liquidation Warwickshire
- Members Voluntary Liquidation Norfolk
- Members Voluntary Liquidation Leicestershire
- Members Voluntary Liquidation Dorset
- Members Voluntary Liquidation Gloucestershire
- Members Voluntary Liquidation West Midlands
- Members Voluntary Liquidation Somerset
- Members Voluntary Liquidation Worcestershire
- Members Voluntary Liquidation Nottinghamshire
- Members Voluntary Liquidation Bristol
- Members Voluntary Liquidation Derbyshire
- Members Voluntary Liquidation Lincolnshire
- Members Voluntary Liquidation Herefordshire
- Members Voluntary Liquidation Staffordshire
- Members Voluntary Liquidation Cardiff
- Members Voluntary Liquidation South Yorkshire
- Members Voluntary Liquidation Shropshire
- Members Voluntary Liquidation Greater Manchester
- Members Voluntary Liquidation Cheshire
- Members Voluntary Liquidation West Yorkshire
- Members Voluntary Liquidation Swansea
- Members Voluntary Liquidation North Yorkshire
- Members Voluntary Liquidation East Riding of Yorkshire
- Members Voluntary Liquidation Merseyside
- Members Voluntary Liquidation Devon
- Members Voluntary Liquidation Lancashire
- Members Voluntary Liquidation Durham
- Members Voluntary Liquidation Tyne and Wear
- Members Voluntary Liquidation Northumberland
- Members Voluntary Liquidation Cumbria
- Members Voluntary Liquidation Edinburgh
- Members Voluntary Liquidation Glasgow