What is a declaration of solvency in an MVL?

December 9, 2021 / MVL

A Declaration of Solvency is a legal document that is required to be signed as part of the Members’ Voluntary Liquidation (MVL) process.

An MVL is a formal liquidation process that closes a solvent company in a tax-efficient manner, making it a popular option for the directors of solvent companies who are looking to close their business.

If you are considering an MVL, Clarke Bell has put together this guide explaining what a Declaration of Solvency is and what part it plays in the liquidation process.

What is an MVL?

An MVL stands for a Members’ Voluntary Liquidation and can be one of the most tax-efficient ways to close down a solvent company. An insolvency practitioner must be used if you want to close your company via an MVL and the assets of the company are usually distributed after 35 days from the date of Liquidation.

A Declaration of Solvency is a critical part of the Members’ Voluntary Liquidation process, but what exactly is an MVL?

A Members’ Voluntary Liquidation is a way for directors of solvent companies to close the business in a tax-efficient way. (A solvent company is one which pay off any of its debts.) It is typically used when the assets (including the cash-at-bank) of the company are over £25,000.

An MVL is a completely voluntary way of closing a company and is the process of dealing with the company’s assets and liabilities in the correct way before dissolving the company.

Also Read: What is Distribution in Specie? Understanding the MVL Process

Why choose an MVL?

There are many reasons a director might opt to close a company through an MVL. Not only is this a quick and hassle-free way to close a company and free up cash, but it is also a tax-efficient way of doing so.

This is due to the fact that funds extracted from the company through an MVL aren’t subject to income tax but Capital Gains Tax. This means they are taxed at just 10% rather than 18% or 28%.

There are additional benefits for company shareholders if they qualify for Business Asset Disposal Relief (previously known as Entrepreneurs’ Relief). This allows a director to sell all or just part of the business whilst paying only 10% in CGT (Capital Gains Tax) on the profits made over the life span of the business, limited to £1 million.

For this reason, closing a company through an MVL can allow a director to make significant savings on their tax bill.

Find out more about why you would choose an MVL in our handy guide.

Also Read: What is Distribution in Specie? Understanding the MVL Process

What is a Declaration of Solvency?

A Declaration of Solvency is a declaration that the company is solvent and can pay all of its debts within 12 months of the start of the liquidation. It needs to be sworn in front of a solicitor who will charge you a fee. Which is typically about £15 – £20. (During lockdown caused by Covid, some solicitors offer a ‘remote swearing’ service instead of a face-to-face meeting.)

When is a Declaration of Solvency needed?

A director must swear the Declaration of Solvency before the MVL can be initiated in order to prove that the company can pay back any outstanding debts within the following year.

A company that can’t confirm its solvency will not be eligible to enter into an MVL.

For companies with one or two directors, both must sign the Declaration of Solvency. For a company with more than two, a majority of directors must sign. The signing has to be witnessed by a solicitor or commissioner of oaths before it is then filed at Companies House.

What happens if I sign a Declaration of Solvency and later find out the company is insolvent?

There are several consequences for directors who have wrongly signed a Declaration of Solvency, knowingly or not.

Signing a Declaration of Solvency falsely is a criminal offence. Meaning that the director can face anything from fines, disqualification from directorship or even a prison sentence in the most serious of cases.

Therefore, it is crucial that you do not sign a Declaration of Solvency if your company is not solvent.

Rather than entering into an MVL, an insolvent company must be closed by other means.

What is a statement of assets and liabilities?

A statement of assets and liabilities provides a complete overview of where the company is financially. Taking into account the cost of the liquidation process plus any interest due to creditors. This allows shareholders to get an accurate depiction of what the capital distribution sum is going to be.

What happens if I declare my company solvent – when it’s actually insolvent?

It is a criminal offence to sign a declaration of solvency relating to an insolvent company either knowingly or unknowingly. Any directors who do so can be faced with:

  • a fine
  • disqualification from acting as a director in the future
  • Imprisonment (in the most serious cases)

How to close an insolvent company

As we have mentioned, an MVL is a way to close a solvent company. Insolvent companies must close through a different process.

One way to close an insolvent company is through the Creditors’ Voluntary Liquidation (CVL) process.

A CVL is a way to close an insolvent company voluntarily. By opting to close a limited company in this way, directors are showing that they are fulfilling their obligations towards creditors to whom the company owes money.

This allows the director to protect their reputation and means that they can open a company in the future if they wish.

To enter a company into a CVL, a director must begin by engaging the services of an Insolvency Practitioner, such as Clarke Bell, who will offer the best advice and oversee the CVL process.

If a director does not voluntarily enter their company into a CVL, the business might be forced to close through compulsory liquidation.

Compulsory liquidation is a serious type of liquidation and can lead to a range of negative consequences for a director.

Compulsory liquidation occurs when creditors issue a winding-up petition to the courts. Creditors are able to do this if they are owed £750 or more and have had several repayment demands ignored over 21 days or more.

If successful, the courts will then issue a winding-up order to the company, which will then be forced to close.

Need help with an MVL? Clarke Bell can help you

If you are planning to close your solvent company through an MVL and wish to get further information on the process – including the Declaration of Solvency – Clarke Bell is here to help you.