The coronavirus pandemic has forced businesses to consider the way they operate and, in some instances, consider whether they have the ability to operate at all. Similarly, there will be many business owners who feel the risk of further pandemics in the future or business fatigue from the recent stressful economic environment has provided them with the incentive they needed to formally close down their business whilst it is still solvent.
When in such a position, a Members’ Voluntary Liquidation, or MVL, should be considered. This arrangement is not to be confused with a Creditors’ Voluntary Liquidation, or CVL; the latter being a decision by directors and shareholders to liquidate the company due to its inability to pay the monies owed to creditors.
What is the procedure?
For an MVL, the first step will be to cease trading and effectively completing the company’s business. Settling any financial obligations now will avoid the need to pay any statutory interest on unsettled creditor claims filed after the formal MVL process has begun. Interest on these claims, which include those owed to HMRC, is high at 8% on top of what the company already owes. The directors should then begin or at least consider beginning the processes of deregistering for any applicable taxes and filing their final accounts and returns.
Crucially, MVLs are only available to solvent companies and requires a sworn statement by the company’s directors confirming that:
It is a critical feature of an MVL that all creditors be paid in full. It is paramount therefore that the basis of the declaration referenced above, has come from a full inquiry into the company’s affairs. This has been known to include an assessment of both the prospective and contingent liabilities of which the directors are aware for a 12-month period beginning on the date of the start of the MVL process.
Once the above has been confirmed, the members (or shareholders) then pass a special resolution (i.e one that must get 75% of the vote) confirming the company is to be wound up. This should be done within five weeks of the declaration of insolvency or the company risks invalidating it. The company then appoints a qualified insolvency practitioner to take control of the business.
By control we mean that the directors’ powers cease, and it is now the liquidator’s function to manage the company’s assets and distribute these among the company’s creditors. Hopefully, there remains a surplus, this is then distributed to the members. Once these formalities are completed and HMRC has provided clearance, the company becomes dissolved and is removed from the register. It is worth noting here that even though the liquidator is appointed by the company itself, should they discover the company was not actually solvent when it began the MVL process, they remain obliged to report on the directors’ conduct – this can lead to director disqualification.
What are the benefits?
Firstly, an MVL enables the company to be bought to a clean and orderly conclusion and closure. They can be planned well in advance and then actioned as soon as the business feels it is ready to commit.
Secondly, because the company is solvent when it enters the MVL, the liquidator is likely to return the members’ company capital in full. Members should also see the benefit of receiving any surplus in a timely manner. Again, because the company was solvent to begin with and with no outstanding liabilities that can be time-consuming to resolve, MVL’s have been known to take 6 months to complete.
Finally, winding up your business using an MVL can lead to tax benefits or relief for the shareholders. In many circumstances, retained profits will be deemed capital and rather than income when distributed to shareholders. Where this is the case, they will be subject to the more favourable Capital Gains Tax rather than income tax.