Members’ Voluntary Liquidation or Dissolution: Which is Best When Closing a Solvent Company?

March 18, 2024 / MVL

When closing a solvent company, choosing the best means of doing so is paramount. A suitable method of closing helps the entire process run smoothly, while keeping costs manageable and affording flexibility to shareholders, amongst other benefits. As such, the first step to closing a solvent company is the careful selection of methods.

Once directors make the decision to close their solvent company, they must choose from a number of potential solutions. Of these, two stand out: Members’ Voluntary Liquidation and company dissolution. Both methods of closing are tried and tested, garnering results for many solvent companies, leading to their reputation of reliability. However, while both are certainly viable options, one may be more useful to your situation than the other.

In this article, Clarke Bell breaks down Members’ Voluntary Liquidation and company dissolution, how they impact companies, and which you should use when closing your solvent company.

How do I know if my company is solvent?

In order to utilise Members’ Voluntary Liquidation or company dissolution, your company must be solvent. This means that your company must be able to repay its debts and other liabilities within a period of 12 months. Additionally, a solvent company is one with a total asset value higher than its total debts. If your company matches this description, it will be considered solvent and eligible for closing using these two procedures.

What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation (MVL) is a voluntary liquidation procedure available to solvent companies. While effective for any solvent company, it is particularly useful and cost-effective for companies with more than £25,000 in retained profits. Retained profits in excess of this sum allow a company to realise the full potential of MVL’s benefits, especially the great tax advantages offered by the procedure.

If you decide to place your company into an MVL, you must first sign a Declaration of Solvency. In short, this declaration states that, to the best of your knowledge, your company is solvent and able to pay its liabilities. The declaration must be sworn before a solicitor in order to take effect. After swearing this declaration, you and your fellow directors will be able to appoint a licensed insolvency practitioner of your choosing to the role of liquidator. While in this role, the insolvency practitioner will be responsible for disposing of company assets, distributing proceeds, filing certain documents, and winding down the company at the end of the process. During this time, directors will retain an enormous degree of control over how the procedure plays out. Should they choose, directors may request for asset distributions to be made in specie, ownership transferred to another entity, and so on.

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Effects of the MVL procedure

Members’ Voluntary Liquidation has a number of beneficial effects on a company. As we have mentioned, directors are able to bring on board an insolvency practitioner of their choosing to carry out the procedure, and directors retain a large degree of control over the process, alongside limited liability. However, arguably the greatest benefit of using the MVL procedure is its tax efficiency.

By placing a company into an MVL, the profits raised through asset disposal will be categorised as Capital Gains, subjecting said profits to Capital Gains Tax (CGT). These tax rates are less than Income Tax rates, resulting in a cheaper tax bill for directors and other shareholders. Furthermore, shareholders may be able to apply for Business Asset Disposal Relief (BADR). If eligible, this relief will entitle shareholders to reduce the tax applied to gains to a mere 10%, provided said gains do not exceed the lifetime limit of £1 million. When used in conjunction with the MVL procedure, this can result in significant tax savings for shareholders.

What is company dissolution?

While an MVL may be a good solution for some companies, it isn’t ideal for all. For some companies, company dissolution may be a preferable alternative. Namely, companies with little in the way of retained profits, such as companies that have remained dormant for some time, may find dissolution to be the better of the two options.

As a procedure, company dissolution may be initiated by filing a DS01 form, costing £8 if done online or £10 if done in paper format, and later posting a notice in the Gazette. In doing so, all related parties that may not have been informed of the directors’ intentions have the opportunity to object. In essence, this prevents insolvent companies from sneaking into dissolution by withholding information from creditors. Should this happen, creditors would have the opportunity to object, reversing the dissolution and potentially forcing the company into involuntary liquidation to recover debts.

After the period required to allow objections has elapsed, directors may begin transferring assets out of the company. This can be done through the sale of assets, distributions in specie, or transferral of ownership. Note that any assets remaining within the company at the end of the procedure will be considered “bona vacantia”, or without an owner. Such assets will be transferred to the Crown.

Effects of company dissolution

Company dissolution is a viable option for closing companies, especially those with too few retained profits to warrant the cost of an MVL. Dissolution is extremely cost-effective, and while the total cost will vary based on how directors handle the procedure, the initiation fee of £8 is unparalleled. However, while cost-effective, dissolution is not very tax efficient, as proceeds will be taxed under Income Tax rates.

In addition to the financial implications, directors have a much greater level of responsibility during company dissolution. Directors have complete control over enacting the procedure, and complete responsibility to do so. In other words, the responsibility falls to directors should things go awry.

Which should I use – MVL or company dissolution?

Both procedures, MVL and company dissolution, are viable methods of closing a solvent company. However, the procedures are geared towards different ends, making them better suited to certain situations over others. Members’ Voluntary Liquidation, for example, is better suited to companies with the retained profits of about £25,000 or more as they can take advantage of the tax benefits. This procedure can also be a good solution for companies with complex finances, which would be difficult for directors to handle without assistance.

Conversely, dissolution essentially offers the opposite. It is best suited to smaller companies looking for a cost-effective solution, and those with more straightforward finances that are easier for directors to manage alone.

Let Clarke Bell help you

Members’ Voluntary Liquidation and dissolution are essential tools for the closing of solvent companies. They provide companies, both large and small, with a clear path forward. However, closing a company is often a daunting task, and assistance can be invaluable. Clarke Bell can be there to help.

We have more than 29 years of experience in helping solvent companies close in the best way possible. We can do the same for you. Whether your company would be best served by an MVL or otherwise, our team of experts can help you achieve the best outcome for your company.

Our MVL fees are very affordable, starting at £995 +VAT +disbursements.

You will be in very safe hands with Clarke Bell, as we have successfully placed more than 3,600 companies through the MVL process; and securely distributed over £559 million to those companies’ shareholders.

Contact us today for your free advice.