Members’ Voluntary Liquidation (MVL)
SOLVENT VS INSOLVENT LIQUIDATION
Despite what many believe, these processes don’t belong in the same box – but it’s easy to see where the confusion lies.
A company that’s unable to pay its debts when due, becomes insolvent. The directors of the company can then wind up the business voluntarily via Creditors’ Voluntary Liquidation (CVL). On the flipside, compulsory liquidation is when a company’s creditor (the person who’s owed money), can start legal action which can include petitioning to close the company.
A company that’s able to pay its debts when due and has a positive balance sheet position, is classed to be solvent. In this case, the company may require an orderly winding up which will ultimately lead to the company being dissolved off the register of companies. At this point, shareholders may be looking for tax-efficient ways to extract capital when the company reaches the end of its natural lifecycle. This formal process is known as a Members’ Voluntary Liquidation (MVL).
What will the directors need to do as part of a MVL?
Directors will be asked to swear a statutory declaration confirming the fully solvent position prior to the company entering liquidation. Critically, they’ll also need to confirm all creditors will be paid in full within 12 months, either prior to the company entering liquidation or as part of the process.
When would I need a Members’ Voluntary Liquidation (MVL)?
It’s important to note MVL requires a company to be fully solvent before the task begins and whilst every business is unique, there are a set of circumstances that may trigger a need for MVL action, such as:
• Retiring shareholders – when directors or shareholders are looking to resign for whatever reason, an MVL’s a good option to re-organise and resolve any issues in time for their leaving.
• Shareholder split – it’s a wise idea to appoint an impartial, professional liquidator to help carry out the dividing of company assets amongst shareholders.
• Restructuring – a restructuring MVL applies to those companies looking to divide or simplify operations into different companies, or close part or all of the business.
• Business exit – MVLs are often a key part of a business’s exit strategy but are only used once plans are set in stone. It can prove to be an efficient way to release capital and ensure the right amount of income tax is paid. If the company has no exit plan, then the sale of the business might be a better alternative to achieve an over and beyond bottom line return.