Members Voluntary Liquidation
A Members’ Voluntary Liquidation (MVL) is a regular method used by shareholders to recoup their investment in a company that is no longer in operation.
In the context of a Members’ Voluntary Liquidation (MVL), a member is a shareholder of the company being liquidated.
A Guide to Members Voluntary Liquidations (MVL)
This article delves into the intricacies of MVL, addressing frequently asked questions about this process. It covers the appropriate circumstances for MVL, eligibility criteria, timeline, tax advantages, the step-by-step procedure, and associated costs.
If MVL aligns with your needs, we are here to assist. Our team of fully licensed Insolvency Practitioners is dedicated to providing cost-effective, efficient, and practical business guidance and solutions.
What is a Members’ Voluntary Liquidation (MVL)?
A Members’ Voluntary Liquidation (MVL) is a formal process for closing down a solvent company. It is initiated by the shareholders of the company. A solvent company is one that has more assets than liabilities, meaning that it can pay its debts.
Shareholders may want to initiate an MVL for a variety of reasons, such as to retire, sell the company, or because the company is no longer profitable. One of the main benefits of an MVL is that distributions to shareholders are taxed as capital gains rather than income tax. This can be a significant tax saving for shareholders.
An MVL, or Members’ Voluntary Liquidation, is a formal procedure for winding up a solvent company. It offers several advantages over other liquidation methods, making it a popular choice for solvent companies seeking to cease operations.
Key applications of an MVL include:
Company Dissolution: An MVL provides a structured and orderly approach to closing down a solvent company, ensuring a smooth transition and minimizing disruptions.
Profit Extraction: MVL offers a tax-efficient mechanism for extracting profits from a company, as distributions to shareholders are treated as capital gains rather than income tax, resulting in significant tax savings.
Corporate Restructuring: MVL can be employed as part of a corporate restructuring strategy, allowing companies to streamline operations, divest non-core businesses, and refocus on core endeavors.
Retirement Planning: Company directors approaching retirement may initiate an MVL to dissolve the company and distribute the proceeds to themselves, securing their financial future.
Asset Sale: MVL can facilitate the sale of a company’s assets to another entity, providing a more efficient and streamlined process compared to selling the company as a whole.
In summary, MVL serves as a versatile and effective tool for solvent companies seeking closure, restructuring, or profit extraction, offering a tax-efficient and structured approach to winding up business operations.
Some MVL Examples
Here are some specific examples of how an MVL might be used:
- Family-owned businesses can utilize MVL to wind down operations and distribute profits among family members.
- Unprofitable companies can employ MVL to cease operations and mitigate shareholder losses.
- During mergers, MVL can facilitate the dissolution of one company and the transfer of assets to the other.
- Business model transitions can be streamlined using MVL to discontinue the old model and initiate the new one effectively.
Under what circumstances is members’ voluntary liquidation (MVL) not a suitable option?
Here are some instances where MVL might not be an appropriate course of action:
The company has substantial liabilities and is unable to settle its debts.
The company is under investigation for fraudulent activities or other misconduct.
The company is embroiled in ongoing legal proceedings.
The company is engaged in a complex commercial transaction.
Companies considering MVL must be solvent, meaning they must:
Fulfill all tax obligations.
Settle all outstanding debts with creditors.
Honor all existing contractual commitments.
Members’ Voluntary Liquidation (MVL) Process
Directors’ Resolution: The company’s board of directors convenes to pass a resolution authorizing a liquidator’s appointment and company dissolution. They also establish the procedure for calling a shareholders’ meeting to vote on the liquidation.
Declaration of Solvency: The directors sign a solvency declaration confirming the company’s ability to fully settle its debts. Within 14 days of signing, the declaration must be submitted to Companies House.
Shareholders’ Meeting: The company’s shareholders assemble to vote on the proposed liquidation. A special resolution (75% majority) is required to approve the liquidation. The resolution’s publication in the London Gazette is also mandated.
Liquidator Appointment: Following shareholder approval of the liquidation, the directors appoint a licensed insolvency practitioner to serve as liquidator.
Asset Realization: The liquidator sells the company’s assets and discharges its obligations.
Shareholder Distribution: Any remaining funds are distributed to the shareholders in proportion to their shareholdings by the liquidator.
Company Dissolution: Once all assets are sold and liabilities settled, the liquidator requests Companies House to dissolve the company.
Several formalities, such as informing creditors and filing documents with Companies House, must be completed during an MVL. The liquidator will guide the company through the process and ensure compliance with all requirements.
How to speed up the MVL process
- To accelerate the MVL process, ensure all necessary documentation is prepared beforehand.
- Promptly respond to the liquidator’s requests to maintain the process’s efficiency.
- Actively collaborate with the liquidator in selling the company’s assets to expedite the liquidation.
- Consider utilizing a deed of indemnity to safeguard against potential liabilities arising from the liquidation.
- Select a liquidator with extensive experience in MVLs to ensure expertise and guidance throughout the process.
- Regularly inform the liquidator of any changes in the company’s circumstances to maintain transparency and prevent delays.
- Proactively address and resolve any disputes that may arise to avoid hindering the liquidation process.
How Long Does a Member’s Voluntary Liquidation take?
The actual liquidation time will vary depending on the complexity of the company’s financial situation.
Our focus at Company Debt is on processing the MVL as fast as possible, and we do this partly by requesting our clients to sign what is called a deed of indemnity.’ This allows for the earliest possible release of funds, often within a week of the MVL’s completion.
The remaining balance depends on how long it takes HMRC to finish their side of the case.
If you’d like a case-specific timeline, call us at your convenience. With the details of your case in hand, we’ll be able to advise fairly accurately how long this might take.
Directors can reap substantial tax benefits from members’ voluntary liquidations (MVLs).
MVLs offer a tax-efficient way to liquidate solvent companies. By opting for an MVL, directors can potentially pay only 10% capital gains tax (CGT) instead of the standard CGT rate of 20%, which can significantly reduce their tax liability. This is particularly advantageous compared to the higher tax rates applicable to dividends (up to 38.1%) and salaries (up to 45%).
This tax relief was previously known as Entrepreneurs’ Relief (before April 6, 2020) and is now referred to as Business Asset Disposal Relief.
What are the Costs of a Members Voluntary Liquidation?
The cost of a Members’ Voluntary Liquidation (MVL) depends on the company’s circumstances but typically involves a liquidator’s fee of at least £4,000 and disbursements like Gazette advertising. Additional costs may include legal fees, accounting fees, and expenses related to asset sales and liability settlements. It is advisable to seek an estimate from a licensed insolvency practitioner before proceeding.
Pros and Cons of an MVL
Pros of an MVL
Maximize tax savings for shareholders: Profits distributed through an MVL are taxed as capital gains, offering a substantial advantage over income tax.
Maintain control over the liquidation process: Directors retain the power to appoint the liquidator and oversee the liquidation proceedings.
Versatile solution for company liquidation: Regardless of size or complexity, an MVL can effectively handle the liquidation of any company.
Efficient and timely liquidation: An MVL can be completed in a relatively short timeframe, typically within a few months, depending on the company’s specifics.
Cons of an MVL
- Financial Implications: The costs associated with an MVL can be substantial and are directly influenced by the company’s size and complexity.
- Procedural Complexity: The MVL process is inherently intricate and time-consuming, demanding careful planning and execution.
- Loss of Control: Upon initiating the liquidation process, the liquidator assumes control over the company’s assets and operations.
- Potential for Conflicts: Disputes may arise among the company, its creditors, and its shareholders during the MVL proceedings.
Can you do a Members’ Voluntary Liquidation (MVL) yourself?
No, you cannot do an MVL yourself. You must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP will be responsible for carrying out the liquidation process in accordance with the law and regulations.
Members Voluntary Liquidation FAQs
To qualify for an MVL, a company must have enough assets to cover all of its liabilities within twelve months of the commencement of the liquidation process.
A straightforward MVL may take between three to six months to complete.
“Despite its numerous advantages, an MVL incurs costs such as liquidator fees. Additionally, the process requires meticulous documentation and adherence to legal requirements, which can be time-consuming.
The liquidator is tasked with the dissolution of the company. This entails the sale of assets, the settlement of outstanding debts, and the distribution of any remaining funds to shareholders. Additionally, the liquidator must ensure compliance with all statutory obligations, such as the filing of final tax returns and the deregistration of the company.
Once the liquidation process has commenced, it is generally irreversible.
As part of the liquidation process, employment contracts are typically terminated. Employees may be eligible for redundancy payments and should seek assistance from the liquidator to claim any outstanding wages or benefits.
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
You can learn more about our standards for producing accurate, unbiased content in our editorial policy here.
- Trusted Source – Legislation – Finance Act 2020, Schedule 3, Entrepreneurs Relief