What Are the Rules For Members’ Voluntary Liquidation?

March 12, 2024 / MVL

Members’ Voluntary Liquidation is a strong contender for directors of solvent companies looking to wind down operations. As a procedure, an MVL affords a range of benefits to the company undergoing liquidation, its directors, and other shareholders with an investment in the company. Among these benefits is a near-unparalleled degree of tax efficiency, and is one of the key advantages provided by the procedure. However, although Members’ Voluntary Liquidation is an extremely useful tool, it isn’t an option for every company. Certain rules must be followed, and eligibility criteria met before you can place your company into the procedure, and failing to abide by these requirements can cause a fair bit of trouble.

In this article, Clarke Bell discusses the rules surrounding Members’ Voluntary Liquidation, what a company must do to be eligible, and what the procedure can offer you.

What is Members’ Voluntary Liquidation?

Members’ Voluntary Liquidation (MVL) is a form of liquidation available to solvent companies, i.e. companies with assets of higher total value than their liabilities. It is a procedure performed by a licensed insolvency practitioner (like Clarke Bell), whom the board of directors will appoint. This insolvency practitioner will spearhead the MVL procedure, ensuring that the company’s assets are sold for the best possible price, proceeds are distributed according to each shareholder’s stake, and legal protocol is strictly followed. At the end of the procedure, the company in question will be wound up and removed from the Companies House register, marking its end as a commercial entity.

Directors may consider an MVL for various reasons. For some, they might wish to retire, using liquidation as a means to free up funds for their retirement. This is fairly common for sole traders and PSCs. For others, an MVL might be considered when it is determined that their companies have stopped being profitable. If reinvigorating the company is too costly, liquidation could be a preferable alternative. No matter the case, the MVL procedure is particularly useful for companies with retained profits in excess of £25,000, as this allows said companies to make proper use of the procedure’s advantages.

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What makes a company eligible for Members’ Voluntary Liquidation?

In order to place your company into an MVL, you must meet certain eligibility criteria and prepare the company for the procedure beforehand. First and foremost, you must ensure that your company is solvent, meaning that it has more assets than it does debts, or can pay its debts in full when due. You will be required to swear a ‘Declaration of Solvency’ before entering the procedure, so trying to slip an insolvent company through is not an option.

Assuming your company is solvent, you must prepare it for the MVL procedure. In practice, this means you’ll need to repay all your company’s current debts, including any outstanding taxes you might have, wrap up any outstanding contracts, and cease active trading once you’ve tied up loose ends. In addition to these steps, you’ll need to ensure no legal action is currently being taken against your company, and if there is, it must be concluded before your MVL application. Lastly, you must have informed the board of directors and gained their consent, and also informed other shareholders of your decision. Once these criteria have been met, you will be able to pursue Members’ Voluntary Liquidation for your company.

Declaration of Solvency

In order to place your company into Members’ Voluntary Liquidation, you must swear a Declaration of Solvency. This declaration essentially states that, to the best of your knowledge, your company is solvent as of the signing of the document. By signing a Declaration of Solvency, you are explicitly stating that your company is capable of repaying its outstanding debts within a period of 12 months. The declaration must be sworn before a solicitor, who will then submit it to Companies House. This gives the document legal weight, allowing a case to be made against directors in the event they have been caught attempting to deceive the parties involved.

Benefits of using Members’ Voluntary Liquidation

Members’ Voluntary Liquidation offers companies and shareholders a wide range of benefits. Directors retain a significant degree of control over how the procedure plays out; unlike with other options, the procedure itself is relatively quick and can be applied to any solvent company regardless of complexity. While these benefits are certainly useful, two others stand out: an effective framework for the liquidation of a solvent company and an excellent means to practice good tax efficiency.

Once directors choose to place their companies into Members’ Voluntary Liquidation, they are entitled to select a licensed insolvency practitioner of their choosing to carry out the procedure. This insolvency practitioner will be responsible for much of the procedure in practice, ensuring assets are liquidated efficiently, proceeds are distributed, and paperwork is properly managed. At the end of the procedure, the insolvency practitioner will wind up the company and remove it from the Companies House register.

The second core benefit afforded by the MVL procedure is a near-unrivalled level of tax efficiency. This is thanks to two reasons: the categorisation of Capital Gains and the application of Business Asset Disposal Relief (BADR). Profits made as a result of the MVL procedure will be classified as Capital Gains, and thereby taxed under Capital Gains Tax rates. These rates are cheaper compared to Income Tax rates, which are present in most alternatives to an MVL. Additionally, eligible shareholders may apply for BADR, formerly known as Entrepreneurs’ Relief, to reduce their tax bill further. BADR can be applied to profits earned through the MVL procedure, and can result in said profits taxed at 10%, provided they do not exceed the lifetime limit of £1 million. BADR can be obtained either through your Self-Assessment tax form, or through Section A of the Business Asset Disposal Relief helpsheet.

Clarke Bell can help

Members’ Voluntary Liquidation is a powerful tool for directors looking to close their solvent company. It affords directors an effective method of closing, keeps taxes at an affordable rate, and ensures the company is closed without any loose ends left untied. However, it is a fairly complex procedure to carry out, and cannot be done without appointing a licensed insolvency practitioner.

Clarke Bell can help in that regard.

We have more than 29 years of experience in helping solvent companies close in the most efficient ways possible, ensuring directors and shareholders keep the fruits of their efforts. We can do the same for you.

Contact us today for a free, no-obligation consultation and find out how we can help you.