A guide to closing down a limited company using a MVL to extract funds as a capital gain.
What is member’s voluntary liquidation?
The liquidation procedure enables the formal winding up of a company’s affairs. All assets are realised, or distributed, in a prescribed order of priority.
A voluntary liquidation is commenced by resolution of the shareholders. A solvent voluntary liquidation is called a members’ voluntary liquidation (often abbreviated to “MVL”). Solvency is defined as being able to pay all the company debts in full together with interest at the official rate within one year.
When can a MVL be used?
A MVL may be used when
- there are a number of shareholders and they require the intervention of an insolvency practitioner to ensure that the correct amount is distributed to each party in accordance with their shareholdings and rights under the company’s articles of association
- the directors and/or shareholders wish to retire
- there is a dispute between the shareholders
- the limited company is no longer required
- there is cash at bank to be distributed or physical property to be distributed in specie
The company must be solvent, this type of liquidation is not appropriate if the company is insolvent.
What is the procedure?
Although a company being placed into members voluntary liquidation will be solvent an Insolvency Practitioner must be used. The Insolvency Practitioner will advise the company’s directors in the period prior to the date of liquidation, ensure that the correct procedure is followed and the necessary documents are completed.
Summary of procedures
- The directors or members decide to wind up the company.
- Closing Accounts completed and submitted.
- The directors call a meeting of members.
- The members resolve to place the company into liquidation.
- A liquidator is appointed.
- The liquidator realises all of the company’s assets or distributes them in specie.
- The liquidator settles creditors’ claims.
- The surplus assets are distributed to the shareholders.
- A final meeting of members is held.
- The company is dissolved.
What are the advantages?
The main advantage is that distributions made in the liquidation count as capital receipts in the hands of the shareholders rather than income and are subject to capital gains tax rather than income tax. When used in conjunction with Entrepreneurs Relief, this can be a very tax efficient method of withdrawing retained earnings from your limited company.
What are the costs?
No Worries has been working with Beacon Licensed Insolvency Practitioners LLP to supply Insolvency services for our clients who are looking to close down their company using the Members Voluntary Liquidation route. Their charge is between £2,250 and £2,750 + VAT, which includes disbursements.
We find that they offer a good level of service, and have a clear understanding of our clients situations.
This is not to say that you have to use their services though. If you look on the internet you can get Insolvency Practitioners who charge anything from £850 to £7500 for this service.
One thing to bear in mind when shopping for your insolvency practitioner – there are some companies which will charge in the region of £630 to £850 for disbursements for a typical MVL of a contractor limited company. So double check all fees involved, and make sure you feel comfortable with the service offered – after all, the company you choose will be looking after all of your company retained earnings on your behalf.
The Liquidation Process
Members’ Voluntary Liquidation Timetable
There are a number of professional liquidators offering a comprehensive service to companies that wish to wind up their affairs by way of a Members’ Voluntary Liquidation.
Below is an overview of the responsibilities of the directors, members, liquidator and tax advisers in a typical liquidation.
1. Directors’ and members’ responsibilities
Clean-up balance sheet
Prior to liquidation the directors should “clean-up” the balance sheet. This will involve disposing of easily realisable assets and payment of liabilities. This will make the liquidation quicker and reduce costs.
Directors’ resolutions
The directors resolve to:
i) Approve the swearing of a Declaration of Solvency.
ii) Put resolutions before the members to place the company into liquidation.
Declaration of Solvency
The declaration includes a statement of assets and liabilities made up to the latest practicable date prior to liquidation. The documentation will be prepared by the directors using up to date financial information. Once it is completed, the form must be sworn by all or a majority of the directors.
Members’ resolutions
When the Declaration of Solvency has been sworn, resolutions are passed by the members to place the company into liquidation and to appoint a liquidator. The documents are sent to the liquidator for advertising and filing as appropriate.
2. Tax advisor’s responsibilities
Tax clearance applied for and received
The company’s tax advisors will be instructed to obtain clearance from the Inland Revenue as soon as possible. This will require the submission of tax returns to the date of liquidation. This process can take several months. It will take longer if the company’s pre-liquidation tax affairs are not in order prior to the commencement of the liquidation. Returns will have to be submitted for the post liquidation period if the liquidator has received any taxable income or realised any capital gains.
3. The Liquidator’s responsibilities
Preparation of documents
The liquidator will prepare all necessary documentation.
Statutory filing and advertising
When the directors and members’ resolutions have been signed, the completed documents should be returned to the liquidator immediately. The liquidator will arrange for all statutory filing and advertising. In addition, the liquidator will normally change the registered office address.
Creditors’ claims invited and paid
Following appointment, the liquidator will place a notice to creditors in the London Gazette to send in their claims. When it has been decided that a payment will be made to creditors, the liquidator will give 21 days’ notice to those creditors that have not claimed to afford them a final opportunity to prove their debt.
Distribution to members
The liquidator would normally be in a position to make a distribution of the surplus assets to the members only when tax clearance had been received, and all other possible claims had been paid and agreed. The liquidator will require an indemnity from the members as protection should a claim be received subsequently from a creditor for which there are insufficient funds available.
Final meeting advertised
When all matters have been resolved and the necessary clearances have been obtained from the Inland Revenue, notice of the final winding up meeting is advertised in the London Gazette giving at least one month’s full notice. A report concerning the final meeting is dispatched to the members.
Final meeting held
The final winding up meeting is held and resolutions concerning the liquidator’s account and the destruction of the company’s records are passed.
Report of final meeting filed at Companies House
The resolutions and the liquidator’s final return are filed at Companies House. The company is dissolved 3 months after the date of the filing of the final return.
FAQ
1. What happens at the members meeting?
Resolutions are passed in order to place the company into liquidation and appoint a liquidator. In certain circumstances resolutions can be passed in writing without a meeting being held.
2. What is the directors’ declaration of solvency?
This important document differentiates a members’ voluntary liquidation from an insolvent liquidation. It requires the directors (or a majority of them) to make a statutory declaration that they have made a full enquiry into the company’s affairs and have formed the opinion that the company will be able to pay its debts in full together with statutory interest within a specified period not exceeding 12 months from the commencement of the liquidation.
The declaration incorporates an up to date statement of the company’s assets and liabilities. It must be made before the members pass the resolutions to wind up.
3. When does the liquidation begin?
The liquidation commences when the resolutions to wind up the company and appoint the liquidator are passed.
4. Can the directors still act?
All powers of the directors cease other than those sanctioned by the shareholders or the liquidator.
5. Who can be the Liquidator and what are his powers?
The liquidator must be a licensed insolvency practitioner. The liquidator has a wide range of powers to enable realisation of the company’s assets, and to agree claims of creditors and to make distributions to creditors and shareholders. The liquidator is able to operate bank accounts in the name of the company and to invest funds.
6. When are payments to creditors made?
The liquidator will advertise for creditors to make claims against the company and will write to known creditors to invite them to make a claim. At least 21 days notice must be given to creditors.
7. Do creditors receive interest on their claims?
The liquidator must pay interest on all creditors’ claims calculated from the later of the commencement of the liquidation or the date the debt was due up to the date payment is made. The rate of interest used is the higher of the judgment debt rate (currently 8%) or the rate previously agreed by the company.
Usually the liquidator is able to pay creditors’ claims at the start of the liquidation so interest is not payable. It is obviously better for creditors to have been paid prior to liquidation.
8. What happens at a final meeting?
As soon as the liquidation is completed the liquidator will call a final meeting of the members and report on the outcome of the liquidation.
9. When is the company dissolved?
The company will be dissolved three months after receipt of the return of the final meeting by the registrar of companies.
10. Can the dissolution be reversed?
An application can be made to the Court within two years of the dissolution for a declaration that the dissolution of the company be void.