A Members Voluntary Liquidation (MVL) is a process in which a solvent limited company can be liquidated in order to distribute the accumulated profits to the shareholders of the company as capital rather than income, incurring preferential tax rates as a result.
Let’s look at Members Voluntary Liquidation in more detail. This a formal process involving directors/shareholders of a company (members) and an Insolvency Practitioner, appointed by the company. Only a solvent company (a company able to pay off their debts) may enter into an MVL and all members must be in agreement with the insolvency process before it can go ahead.
The Insolvency Practitioner is tasked with settling all outstanding debts and legal disputes and must pay creditors through the profits of the company and the sale of assets. Once all debts are cleared, the remaining profits are distributed amongst the ‘members’.
Why enter into an MVL?
After all creditors are paid in full and the remaining profits total more than £25,000, an MVL is the most tax efficient way to dissolve a company. As the profits are distributed to shareholders as capital, rather than as income, capital gains tax is enabled and charged at a rate of as low as 10%, whereas if shareholders had simply drawn the profits as a dividend, this would be treated as income and income tax could be chargeable at up to 50%. Understandably, these tax benefits mean that an MVL is a highly favoured solution for liquidation.
When to enter into an MVL
To use an MVL, as well as the company being solvent and able to meet debt and legal obligations, all documents and affairs must be in order for the insolvency practitioner to start MVL proceedings.
There are a few reasons why members may decide to liquidate a company when it remains solvent, for example, company directors may wish to retire but have nobody to pass the company on to, they may have completed a contract so that the company is no longer required, they may wish to close the company to start a new venture, or a business may be rendered unnecessary as a result of external factors.
What is the MVL process?
The process of Members Voluntary Liquidation is often simple, but it does require that 75% of the company shareholders (in share value) agree. For MVL proceedings to start, the company in question must meet the following criteria:
- Ceased to trade
- Anticipate having surplus funds remaining once creditors are paid
- Deregistered for VAT, Corporation Tax and PAYE/NIC (or in the process of deregistering)
- All accounts and returns up to the date the business ceased trading filed or in the process of completing and filing
- Able to pay creditors within 12 months of the start of liquidation.
The following processes can then be followed:
- Members must make a statutory declaration that the company is solvent. This financial statement must be sworn before a solicitor or notary – all directors or shareholders must swear on the prepared statement.
- Within 5 weeks of this statutory declaration, a shareholders meeting must be held so that a resolution can be passed to agree on the company’s liquidation, and to appoint a liquidator. Only a licensed insolvency practitioner can be appointed as a liquidator for an MVL.
- An insolvency practitioner then takes control of the company, settling any creditor claims and distributing the remaining profits to the members to wind up the company. The IP will require HMRC references, details of assets and liabilities, bank details and identification documents.
- A company’s assets may not necessarily be sold, as they can be distributed to members.
- Any creditor claims that are paid after the commencement of the liquidation are entitled to statutory interest (currently 8%) in addition to the money owed.
Assuming that the necessary information is provided and any liabilities are settled before the appointment of an insolvency practitioner, the process of distributing assets to members can take place in as little as 21 days. The total time estimated for closing the case and subsequent dissolution of the company depends upon clearance from HMRC. This process could take 3 months or longer.
How does an MVL differ from a CVL?
The main differentiation between an MVL and CVL is that an MVL requires the company to be solvent, whereas a CVL is a liquidation process for an insolvent company. Both processes are entered into voluntarily, however, the funds are distributed differently (MVL surplus funds go to shareholders, whilst CVL funds must go to creditors).
Essentially, a Members Voluntary Liquidation helps company members to retain funds and benefit from tax relief, whilst a Creditors Voluntary Liquidation protects creditors, helping them to be paid the money owed to recoup losses.
Help with Members Voluntary Liquidation
If you are a company director and are looking to wind up your solvent business in the most beneficial way for your shareholders, then an MVL could be the best option. For assistance and more information on the processes involved in an MVL, you can contact BEACON Licensed Insolvency Practitioners.