Liquidation is a term usually associated with the bad side of business. It’s what happens when things go irretrievably wrong, the end game of insolvency if recovery isn’t possible. It’s also often a fate forced onto businesses by outside parties and the courts when they can no longer pay their debts.
However, liquidation neither has to be compulsory nor the result of insolvency. Members Voluntary Liquidation (MVL) is a process for shutting down a solvent company. And as its name suggests, it’s entirely voluntary. ‘Members’ refers to the company directors and shareholders who take the decision to wind up a company.
Why would a solvent company be wound up by its own stakeholders voluntarily? There are many reasons why people might want to shut down a business even if it isn’t in financial difficulties. Those running the show might have achieved all their goals, or be ready to move on to another venture. And solvent doesn’t necessarily mean particularly profitable.
Controlled and efficient
One of the key benefits of an MVL is that it provides a controlled and efficient way of closing down a company. For one, because it involves appointing an Insolvency Practitioner (IP) as a liquidator as with non-solvent liquidations, everyone can be confident that the process is managed professionally and that all legal requirements are met. A company’s assets are realised and used to pay off any outstanding debts, taxes, and other liabilities before any surplus is distributed between shareholders. The involvement of an IP in handling all of this can be particularly important for companies that have complex structures or a large number of assets or liabilities.
Another advantage of an MVL is that it can be a tax-efficient way of distributing the company’s assets to its shareholders. Payments made to shareholders from the assets of a defunct company will usually be taxed as income. However, following an MVL, they are treated as capital distributions, and therefore subject to lower tax rates.
The MVL process typically involves the following steps:
- Appointment of a liquidator: Shareholders must pass a special resolution to appoint a liquidator. The liquidator must be a licensed insolvency practitioner and is legally responsible for managing the liquidation process.
- Preparation of a statement of affairs: The company’s directors must prepare a statement of affairs, which sets out the company’s assets and liabilities as they are at the date of the resolution to wind up the company.
- Meeting of creditors: The liquidator must convene a meeting of the company’s creditors, at which the creditors can vote on the liquidator’s appointment and on any proposals for the distribution of the company’s assets.
- Realisation of assets: The liquidator must realise the company’s assets and distribute the proceeds to its creditors in accordance with the law.
- Distribution of remaining assets: Once all the creditors have been paid, any remaining assets are distributed among the company’s shareholders in accordance with their shareholdings.
- Final meeting: The liquidator must convene a final meeting of the company’s shareholders, at which the liquidation is formally brought to a close.
So to sum up, an MVL is a legal process that allows a solvent company to be closed down in an orderly and efficient (including tax efficient) manner. Despite being a ‘solvent’ liquidation process, it is still a process defined and governed by insolvency law, which is why MVLs are administered by licensed IPs acting as liquidator. The liquidator follows a strict procedure that ends with assets from the wound-up company being realised and then distributed, first to pay off outstanding debts with creditors, and then as capital payments to shareholders.
Considering closing your business? Get in touch with our experienced team of licensed insolvency practitioners to find out more about whether a Members’ Voluntary Liquidation is the right option for you.