Members Voluntary Liquidation: Meaning
Members Voluntary Liquidation (or MVL) is a process where the management or the members decide to close the operations or exit the business of a company which is still solvent. A solvent company means a company which currently has surplus assets even after paying all its liabilities. The first and foremost step for MVL is the appointment of a Liquidator for the closure of the company.
After the Liquidator sells the company’s assets and pays all the debts, the remaining surplus is returned to the shareholders in the form of capital. Returning funds in the form of capital has more tax benefits than distributing them as an income.
- Members Voluntary Liquidation: Meaning
- Members Voluntary Liquidation: Requirement
- Members Voluntary Liquidation: Reason
- Members Voluntary Liquidation: Process
- Members Voluntary Liquidation Timeframe
- Cost of MVL
- Members Voluntary Liquidation: Benefits
- How is MVL Different from Dissolution and CVL?
Members Voluntary Liquidation: Requirement
To take up the MVL, a company must be:
- Capable of paying taxes.
- Capable of paying creditors.
- Can meet all other contractual obligations.
Members Voluntary Liquidation: Reason
Following are some of the popular reasons why shareholders go for Members Voluntary Liquidation:
- If a solvent company intends to end operations, then using MVL could be the most tax-efficient exit strategy for the shareholders.
- If some shareholders intend to split the company’s assets, then again use of MVL could help.
- MVL is helpful for directors or shareholders who want to retire or wish to settle in another country.
- When all the members of the company want to exit simultaneously (at one go) and no one wants to continue and operate the company.
- If the company was formed to achieve a certain objective, and that objective is met. Then directors or shareholders can use MVL.
- A holding company can use MVL to reorganize its subsidiaries. For instance, if any subsidiary is not required or is not active, then the holding company can use MVL to end its operations.
- If the current business has become redundant because of any external or regulatory changes.
Members Voluntary Liquidation: Process
Following is the usual process that members need to follow in case of Members Voluntary Liquidation:
Write a Declaration of Solvency
Such a declaration usually includes the name and address of the firm, the names and addresses of the directors, and the duration that a firm could take to pay its debts. A point to note is that this duration can not usually be more than 12 months from the date of liquidation. The declaration basically states that the business will be able to pay its debt in under 12 months. Moreover, a detailed statement of firm’s assets and liabilities should be attached to this Declaration of Solvency.
Once members create the declaration, they need to sign it. However, all or the majority of directors need to sign the declaration in the presence of a solicitor or notary.
Call a Meeting with Shareholders
In the next step, the Directors have to call a meeting of all of its shareholders. The objective of the meeting is to vote on the MVL where a minimum of 75% or more shareholders should support the MVL process. Moreover, such a meeting should be called, usually, within a period of five weeks from the signing of the solvency Declaration.
Appoint Insolvency Practitioner
The actual liquidation process can start only once the shareholders agree on the MVL. If the shareholders agree to the proposal then they will appoint an insolvency practitioner also during thus meeting itself. This insolvency practitioner, who will work as a liquidator, will have the responsibility to sell the assets, pay the debts, settle disputes (if any), and return the remaining proceeds, if any, to the shareholders.
Advertise the Closure in a Local Gazette
After the appointment of the insolvency practitioner, directors or members do not have any operational rights and broadly can not interfere in the affairs of the company. As all the operations will now be managed by the Liquidator. However, they still remain the directors and they have the obligation to officially announce the liquidation. They can do so by advertising in the local Gazette.
Submit Paperwork to Companies House
Generally, within 15-days of the shareholders’ meeting, directors or members must submit all relevant documents, including a declaration of solvency, financial statements, and more, to the relevant government agencies.
Members Voluntary Liquidation Timeframe
MVL is relatively quicker and easier process to end a solvent business than an insolvent business. However, there is no specific timeframe for MVL; rather, the timeframe varies on a case-by-case basis.
To speed up the whole process and ensure the process runs smoothly, there are a few things that members can do. Before the appointment of the Liquidator, they can keep ready all relevant documents, including financial statements; settle all liabilities, and make an appointment with the solicitor about the declaration of solvency.
Cost of MVL
Usually, it is the Liquidator that communicates the cost in an MVL to the members. The total cost for MVL is made up of two basic costs, and these are the Insolvency Practitioner’s Fee (it varies as per the complexity of the case) and Disbursements. Other costs could be the fee to advertise in The Gazette, applicable taxes, the cost of paperwork, etc.
Members Voluntary Liquidation: Benefits
Some of the benefits of MVL are as follows:
- The process of VL is quite fast.
- The VL process gives a fair assurance that the business will be properly wound up with due supervision of an independent Liquidator.
- The liquidator has the authority to deal with any issues with the claims of creditors.
- Shareholders may get the funds relatively quickly.
Apart from these benefits, the biggest benefits of MVL are:
Tax Benefits of Members’ Voluntary Liquidation
MVL offers many tax benefits to the members. The biggest and the most obvious one is that the distribution to the shareholders is in the form of capital. And capital distributions attract a lower tax rate in comparison to dividends.
Another benefit is that the distribution may be eligible for Entrepreneurs Relief (or Business Asset Disposal Relief). It is primarily a government program that enables a lower Capital Gains Tax on the qualifying assets.
How is MVL Different from Dissolution and CVL?
Dissolution is a simple, quick, and cost-effective method to cease a limited company. It involves fewer steps in comparison to MVL. However, to qualify for the dissolution, a company must not be active in the last three months, nor have any agreements with creditors, and has not faced (or will face) any liquidation threat. This means that if your company is actively operating, then you can not go for Dissolution.
Creditors’ Voluntary Liquidation (CVL) is very similar to MVL. Both are voluntary and involve similar processes. The primary difference between the two is that CVL is for insolvent companies, while MVL is for solvent companies. This implies that adverse financial condition is usually the reason behind CVL. Another difference is that in the case of MVL, creditors are unlikely to get the full payment. But, in MVL, creditors receive the full payment.
We can say that MVL intends to help members and owners to easily and quickly liquidate a business. And CVL aims to help creditors to get the maximum payment in case of liquidation.
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