A Members’ Voluntary Liquidation (MVL) is a shareholder-initiated liquidation procedure to close down a solvent company. It is appropriate for companies with assets over £25,000.
The term “Member” is used because, in the UK, shareholders of a limited company are officially referred to as “Members” of the company.
One of the main benefits of a members’ voluntary winding up is that distributions to shareholders are taxed as capital gains rather than income tax. This can be a significant tax saving for shareholders.
The liquidator will sell the company’s assets and distribute the proceeds to the shareholders.
Pros and Cons of an MVL
Pros
A tax-efficient way to distribute profits to shareholders
Control over the liquidation process
An MVL can be used to liquidate a company of any size or complexity.
An MVL can be completed in as little as a few months.
Cons
The costs of an MVL can be significant.
The MVL process can be complex and time-consuming.
Once the liquidation process has begun, the liquidator has control over the company’s assets and affairs.
Disputes can arise between the company, its creditors, and its shareholders during the MVL process.
What are the Eligibility Requirements for an MVL?
To be eligible for a Members Voluntary Liquidation (MVL), a company must be solvent, meaning it can pay all its debts, along with any statutory interest, within 12 months of the liquidation commencement date [1]Trusted Source – GOV.UK – Liquidate a company you do not want to run anymore
While not a strict requirement, the company should ideally have at least £25,000 in retained assets to justify the costs associated with the MVL process, as professional fees can be substantial.
Additionally, there must be no outstanding winding-up petition against the company.
When is an MVL Not Appropriate
Here are some examples of when an MVL might not be appropriate:
The company has liabilities and cannot pay its debts.
The company is being investigated for fraud or other wrongdoing.
The company is subject to legal proceedings.
The company is involved in a complex commercial transaction.
Companies choosing members’ voluntary liquidation should be solvent:
able to pay all taxes
able to pay all creditors
able to meet all existing contractual obligations
What is the Process for Initiating and Carrying out an MVL?
In a Members’ Voluntary Liquidation (MVL), the dissolution of a solvent company typically follows these steps:
Directors’ Resolution to Liquidate
The initiation of the MVL process begins with the company’s directors convening a board meeting. During this meeting, a resolution is passed to appoint a liquidator and set the wheels in motion for the company’s wind-up. Additionally, the directors determine the procedure for convening a shareholders’ meeting to secure approval for the impending liquidation.
Declaration of Solvency
Crucially, the directors formally confirm the company’s financial health by signing a declaration of solvency. This declaration attests that the company possesses the capacity to fully settle its debts. It is imperative to submit this declaration to Companies House within 14 days of its endorsement[2]Trusted Source – GOV.UK – Give notice of statutory declaration of solvency (LIQ01)
.
Shareholders’ Meeting
The next important juncture involves a gathering of the company’s shareholders. Their primary purpose is to cast their votes on the proposed liquidation. A special resolution, necessitating a majority consensus of 75%, is mandated to validate the liquidation decision. Moreover, the resolution must receive public notice through publication in the London Gazette.
Appointment of Liquidator
With shareholder approval secured, the company’s directors proceed to designate a licensed insolvency practitioner to assume the role of the liquidator. This expert will oversee the execution of the liquidation process.
Asset Realisation
The liquidator assumes the responsibility of realising the company’s assets. This entails selling these assets and diligently settling any outstanding liabilities.
Distribution to Shareholders
Following the completion of debt settlement, any remaining funds are equitably distributed among the shareholders. The distribution aligns with the respective proportions of their shareholdings.
Dissolution of the Company
Once all company assets have been divested, and all financial obligations have been met, the liquidator takes the final step by submitting an application to Companies House, seeking the official dissolution of the company.
Several other formalities require attention during the MVL process. These include creditor notifications and the submission of various documents to Companies House. Your appointed IP will advise you on all of this.
What Are the Directors’ Duties and Liabilities During an MVL?
During an MVL, directors must act in the best interests of the company and its creditors.
Directors are required to provide accurate information to the liquidator, cooperate fully with the liquidation process, and ensure that all company assets are properly disclosed and distributed. D
Directors may be held personally liable if they fail to carry out their duties properly or if they make false statements in the Declaration of Solvency.
How Long Does a Member’s Voluntary Liquidation Take?
Most MVLs are concluded within 12 months.
Our focus at Company Debt is on processing the MVL as fast as possible. We do this partly by requesting our clients to sign a deed of indemnity. This allows for the earliest possible release of funds, often within a week of the MVL’s completion.
What are the Costs of a Member’s Voluntary Liquidation?
The costs of a Members’ Voluntary Liquidation (MVL) can vary significantly depending on the size, complexity, and circumstances of the company being liquidated.
As a general guide, you should expect to pay at least £4,000 for the liquidator’s fee, plus disbursements such as Gazette advertising (typically around £60).
The Tax Benefits of a Members’ Voluntary Liquidation
MVLs come with significant tax benefits.
It’s possible to save money with an MVL by paying only 10% capital gains rather than the normal CGT rate of 20% (or 28% if the gains relate to residential property).
In fact, these gains are even more substantial if you consider the alternatives of extracting the profits as dividends up to 38.1%) or salary (up to 45%).
This was known as Entrepreneurs Relief (before 6 April 2020) and is now called Business Asset Disposal Relief.
What are the Criteria for Business Asset Disposal Relief in an MVL?
To qualify for BADR, the director must have held the shares for at least two years and must have at least 5% of the company’s shares and voting rights.
Criteria
Description
Ownership and Trading Period
The shareholder must have owned the shares for at least two years and the company must have been trading for at least two years.
Shareholding
The shareholder must own at least 5% of the company’s ordinary share capital and voting rights.
Active Participation
The shareholder must be an officer or employee of the company or a group company or have been for a continuous period of at least two years.
Maximum Relief
The maximum relief available is £1 million per individual over their lifetime.
A claim for BADR, must be submitted to HMRC within two years of the end of the tax year in which the business is sold or liquidated.
For example, for a sale that takes place in the 2021/22 tax year (which ended on 5th April 2022), any claim for Business Asset Disposal Relief on this disposal must be made to HMRC by 5th April 2024.
It’s important to note that the claim is made on the personal tax return of the individual who made the capital gain.
Can you Organise a Members’ Voluntary Liquidation (MVL) Yourself?
No, you cannot do an MVL yourself.
You must appoint a licensed insolvency practitioner (IP) to act as the liquidator. The IP will be responsible for carrying out the liquidation process in accordance with the law and regulations.
Members Voluntary Liquidation FAQs
How does a company qualify for an MVL?
To be eligible for an MVL, a company must be solvent. In other words, it must be capable of settling all its debts within 12 months of initiating the liquidation process.
How long does an MVL typically take?
A straightforward MVL may take between three to six months to complete.
Are there any downsides to an MVL?
While advantageous in many respects, an MVL involves costs such as professional fees for the liquidator. Moreover, the process demands meticulous documentation and compliance with statutory obligations, which can be time-consuming.
What is the role of the liquidator in an MVL?
The liquidator is responsible for winding up the company’s affairs. This includes selling assets, settling debts, and distributing the remaining funds to shareholders. The liquidator must also ensure that all statutory obligations are met, including final tax returns and deregistration of the company.
How is an MVL different from a Creditors’ Voluntary Liquidation (CVL)?
Unlike an MVL, a CVL is used when a company is insolvent and unable to pay its debts. In an MVL, the process is initiated by the directors and approved by shareholders, whereas in a CVL, creditors are more directly involved in the process.
Can an MVL be reversed?
Once the liquidation process has commenced, it is generally irreversible.
What happens to employees during an MVL?
The termination of employment contracts is typically part of the liquidation process. Employees may be entitled to redundancy payments and should claim any owed wages or benefits from the liquidator.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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