The basic purpose of a Members’ Voluntary Liquidation (MVL) is to return to shareholders surplus assets in a company which have no further purpose. The attractions of a MVL over normal dividends are:
1. The distributions are treated as capital rather than income for shareholders and are therefore (subject to certain conditions) available for reliefs such as Entrepreneurs Relief.
2. Share capital can be legally distributed. Formal liquidation can also be used for tax efficient reconstructions, for example the partitioning of a company’s assets either between owners or to split activities currently carried out by one company into two or more stand alone companies. This process, using s110 Insolvency Act 1986, is commonly used to separate property assets from trading in advance of a sale of a business.
Prior to 1 March 2012 it was possible to obtain HMRC consent for a return to shareholders to be treated as capital if done in anticipation of an application to Companies House for the company to be struck off (Extra Statutory Concession C16).
However, following a change in the rules with effect from 1 March 2012, there is a limit of £25,000 on the amount of assets that can be returned under the new legislation. The impact is that any company with assets over this limit will require a formal liquidation to achieve capital treatment. The legislation for this is as per CTA 2010 s1030A.
The key steps are:
1. The Directors make a Statutory Declaration of Solvency stating that the company can pay all of its debts within no more than 12 months.
2. The shareholders at a general meeting (or by written resolution) place the company into liquidation and appoint a liquidator.
3. The liquidator advertises the liquidation (normally in the London Gazette alone) and takes steps to ascertain and settle any liabilities.
4. After paying or providing for any creditors, surplus assets are returned to shareholders.
5. Once all creditors are paid and assets distributed the liquidation is completed and the company is then struck off the register of companies.
It is normal for the liquidator to obtain an indemnity from shareholders so that if any creditor claims emerge after distribution of assets to shareholders, funds distributed are paid back into the liquidation sufficient to pay the liability.
Strategy and costs
Ideally, and subject to any tax related time pressure to protect reliefs, the company should be tidied down as much as possible before liquidation: assets realised into cash (unless to be distributed in specie to shareholders) and all liabilities paid.
If this is done then, subject to all information to prepare the Declaration of Solvency and to call the necessary shareholder meeting being available, the cost of the liquidation should not exceed £3,500 plus VAT and disbursements.The cost will increase if any issues arise with creditors or shareholders.
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