A Members’ Voluntary Liquidation [MVL] is a solvent liquidation where, from the outset, it is envisaged that all creditors will be paid in full.
An MVL is a formal legal process governed by the Insolvency Act 1986 [the Act] and The Insolvency Rules [England and Wales] 2016 [the Rules] for companies that are incorporated in England and Wales. The legislation relating to companies incorporated in Scotland and Northern Ireland is very similar to the law in England and Wales.
The role of Liquidator can only be undertaken by a Licensed Insolvency Practitioner [LIP] who is an individual licensed so to act by one of a number of licensing bodies. The bodies with the largest numbers of licence holders are the Institute of Chartered Accountants in England and Wales [the ICAEW] and the Insolvency Practitioners Association [the IPA].
An MVL can also be utilised as a tax efficient way of reconstructing the financial affairs of a company. This is often referred to as a S110 Reconstruction [referencing S110 of the Act]. Done correctly, and a capital gains tax charge can be avoided at both the corporate and shareholder level. It allows for a Liquidator to accept shares in a new company or companies as consideration for a part or whole disposal of the business and assets of the company that is in MVL. S110 is particularly useful where a company operates more than one type of business and the shareholders want to dispose of one of the businesses or where the shareholders wish to split between themselves assets [for example investment properties] and go their separate ways.
An MVL is the only type of solvent liquidation process.
Tax Considerations
In most cases, an MVL is the best way for a shareholder to get his/her money out of a company in a tax efficient manner. In addition, as outlined above, it can be used as a tool to carry out the reconstruction of the assets or trade of a company. The tax considerations of shareholders usually drives the timing of an MVL liquidation. Capital reliefs, such as Business Asset Disposal Relief [BADR] [aka Entrepreneurs’ Relief], can be applied [to a qualifying business/trade] to all capital distributions made by the Liquidator to individual shareholders who own 5% or more of the company’s shareholding. The MVL liquidation allows for capital distributions of physical assets to shareholders rather than income distributions [i.e. salary or dividends]. Currently, for UK taxpayers, the tax paid on capital receipts is significantly less than for income receipts.
Accordingly, tax planning, prior to the commencement of the liquidation is essential and must remain the responsibility of the company’s existing tax advisers and those tax consultants advising the individual shareholders.
In basic terms, the main tax reliefs available to individual shareholders can be summarised as follows:
- Business Asset Disposal Relief [aka Entrepreneur Relief]– is a relief which can be applied to all capital distributions by the Liquidator to shareholders who own 5% or more of the company’s shareholding as long as the company has operated a qualifying business or trade. When BADR is available as a result of an MVL, a capital distribution to a shareholder could be taxed at an. effective Capital Gains Tax rate as low as 10%, instead of being taxed as a dividend receipt on an effective rate of up to 42.5%.
Each eligible individual shareholder is allowed to claim up to £1 million worth of BADR in a lifetime. BADR reduces the amount of the Capital Gains Tax (CGT) on a disposal of qualifying business assets on or after 6 April 2008, as long as the shareholder has met the qualifying conditions throughout a two-year qualifying period either up to the date of disposal or the date the business ceased.
BADR is available to individuals and some trustees of settlements, but it is not available to companies or personal representatives of deceased persons or in relation to a trust where the entire trust is a discretionary settlement. - Annual Exemption – in addition, there are available to all shareholders that are individuals, the usual annual exemption tax free allowance [known as the ‘Annual Exempt Amount’] which allows shareholders to make a certain amount of gains each year before tax has to be paid- the annual tax-free allowance for the Tax Year 2021/2022 is £12,300.
How do companies go into liquidation?
In an MVL, the Shareholders pass a Special Resolution to wind up the company at a General Meeting of Members or now more usually by way of Written Resolution. If there are only 2 shareholders, both must vote in favour of the Special Resolution, notwithstanding their respective voting rights. If there are 3 or more shareholders, then the Special Resolution is passed when 75% or more of those entitled to vote have voted in favour or consented to the proposed Written Resolution.
An Ordinary Resolution is passed appointing a Liquidator to carry out the winding up procedure.
The liquidation commences from the time that the Special Resolution to wind up has been passed by the Members.
The creditors of a company that is going into MVL have no say as to the person who is to be appointed Liquidator. Prior to the passing of the Special Resolution, both directors [if there are only 2] or a majority of directors must declare before a solicitor [where one or more of the directors is based overseas, the declaration usually takes place before a Notary Public] a Declaration of Solvency stating that they have made a full enquiry into the affairs of the company and are satisfied that it will be able to settle all its debts [together with Statutory Interest at 8% per annum] within 12 months of the commencement of the MVL. Under the Act it is a criminal offence for a company director to make a statutory declaration of a company’s solvency without reasonable grounds.
The Declaration of Solvency is filed at Companies House as part of the liquidation process.
Role of the Liquidator
The Liquidator will:
- Advertise in the London Gazette details of the liquidation
- Get in assets
- Agree the claims of creditors and pay dividends and Statutory Interest
- Obtain tax clearance from HM Revenue & Customs [HMRC]
- Make Capital Distributions of cash or assets to shareholders where funds allow
- Issue Annual Reports to Members should the liquidation exceed 12 months
- Cease to act, bringing the liquidation process to an end
In an MVL, one of the main tasks of the Liquidator is to get tax clearance from HMRC in respect of all taxes that the company may owe to government bodies.
If the company’s Articles of Association provide for it or if the shareholders duly resolve at the initial meeting of shareholders, the Liquidator can distribute assets in specie, that is to say he can distribute the physical assets to the shareholders rather than first sell them and convert them into cash. This often happens in the case of freehold land or large items of plant and machinery.
The date of a capital distribution, whether in cash or physical asset, will represent a chargeable disposal event of a chargeable asset by a chargeable person for the purposes of calculating an individual’s CGT in any given tax year.
Consequences of Liquidation
On liquidation, the executive powers of the Directors cease as does the trading of the company [except in exceptional circumstances where for instance perishable good need to be disposed of]. The Act and Rules give the Liquidator extensive powers to conduct the company’s affairs.
Details of the liquidation are advertised in the London Gazette as is an advertisement inviting claims from creditors to be made by a certain date to the Liquidator.
The fact that a company has gone into liquidation, should have absolutely no effect on the personal credit rating of a director or shareholder.
End of the liquidation
Most liquidations are concluded within 12 months of commencement. Delays tend to arise as a result of any hold up in receiving tax clearance from HMRC or when unanticipated creditor claims arise.
The Liquidator will file a final report to Members and file the necessary cessation forms with Companies House. 3 months after the Registrar at Companies House has received such notification, the company will be deemed to be dissolved.
In conclusion
The primary aim of an MVL liquidation is to ensure that parties receive what they are entitled to in the order of priority as laid down in the Act and Rules. It is the job of the Liquidator to make sure that such priority is respected.
An MVL is largely driven by tax considerations and the narrative is controlled by the shareholders.
Early professional advice should be sought from a LIP, to ensure the timely implementation of the liquidation process.
