How and Why to place a Company into Members Voluntary Liquidation ("MVL")

A Members Voluntary Liquidation, or MVL, is an insolvency process for solvent companies, where all creditors will be paid in full and the surplus assets are distributed to the shareholders, often with advantageous tax benefits.

With the Chancellor looking at ways to raise taxes due to the Coronavirus Pandemic, many directors and shareholders of owner managed businesses are taking the view that it is better to get their hard-earned funds out of their businesses before any changes, and potential increases in tax, are made.

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Declaration of Solvency

The first step to place any company into Members Voluntary Liquidation (however it is normally done on the same day as holding the shareholders meeting below) is to prepare a Declaration of Solvency.  

A Declaration of Solvency is essentially a summary of the Company's assets and liabilities together with a statement which says that the directors have reviewed the company's financials and are fully confident that the company can pay all of its liabilities, in full, within one year.

The Declaration of Solvency is then sworn by a majority of the directors (or by both of them if there are only two) in front of a local solicitor either physically, or remotely due to the current coronavirus restrictions.

The Declaration of Solvency is a very important document and it is a criminal offense to swear a materially incorrect or misleading declaration.

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Shareholders Meeting

In small owner-managed businesses the directors and shareholders are usually one and the same.  Accordingly, the directors resolve, by way of a board meeting, to call a meeting of shareholders to pass a special resolution to Wind Up the company and for it to be placed into Members Voluntary Liquidation.

Normally, a Special Resolution requires 14 days notice however if 90% of the shareholders agree this 14 day notice period can be waived, which makes it possible in owner managed businesses to undertake the entire process of calling and holding a meeting of shareholders the same day.

At the Shareholders meeting the shareholders also appoint their choice of liquidator and pass the necessary resolutions to agree the costs of the liquidation.

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Practicalities

In order to make the process as simple as possible it is always best to agree a date for the Company to be placed into Liquidation. On agreeing the date to place the company into Liquidation you would also have to book an appointment with a local solicitor to swear the Declaration of Solvency.

Once the documents have been sworn the Company is formally in liquidation and the process of liquidating the Company and distributing the assets back to the shareholders can begin.

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Entrepreneurs Relief

Entrepreneurs Relief, or Business Asset Disposal Relief as it is now called, is a tax relief whereby monies withdrawn from a company, via a capital distribution in a Liquidation, are charged at 10% as opposed to the higher capital gains tax rates, or even higher income tax rates.

This can generate a significant tax saving for shareholders.

In the last budget it was feared that the Chancellor was going to remove this relief completely, but instead he reduced the lifetime limit to £1million.  With talk of increases to the capital gains tax rates and raising further taxes across the board, it is no wonder that Insolvency Practitioners have seen a significant increase in the amount of clients wanting to place their companies into Members Voluntary Liquidation.

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For further information, including a video explaining how a MVL works, you can visit our How to Place a Company into Members Voluntary Liquidation page on our website.

 Should you wish to discuss any aspects of this blog or specific issues about your company and situation, please do not hesitate to contact me for a free meeting on 01326 340579 or by email chris@purnells.co.uk