Who Initiates a Members Voluntary Liquidation?

May 16, 2022 / MVL

A Members’ Voluntary Liquidation (MVL) is one of the most common methods of closing down a solvent limited company.

The MVL process is the most tax-efficient option for companies with large retained profits, allowing shareholders to keep as much of the company’s value as possible.

In this article, we will be breaking down the process, explaining who initiates a Members’ Voluntary Liquidation, and why you might consider it for your company.

What is an MVL?

An MVL is a very tax-efficient method of closing down a solvent company. It is typically used to wind down a successful company where the shareholders would prefer to extract what profits they can, rather than continue operations. This could be for a range of reasons, including moving to a PAYE-role (perhaps due to the IR35 / off-payroll changes) or retirement.

The MVL process is entered into voluntarily, and it is initiated by a company’s directors. Shareholders must then be notified of the intent to close, and 75% must give their consent for the process to begin.

An Insolvency Practitioner must be appointed to deal with a Members’ Voluntary Liquidation, as they are the only ones with the authority to put a company through the MVL process.

The MVL process

Before Liquidation Proceedings can commence, we would need the following completed:

  • final accounts, made up to the date the company ceased to trade
  • all creditors to be paid
  • any physical assets to be disposed of
  • any outstanding charges to be satisfied
  • the final VAT return and Corporation Tax Return to be submitted (upon the company being placed into Liquidation, a further short period return will be required to be submitted)
  • if any liability is owed to HMRC after the submission of these forms, this will need to be paid.

Before Liquidation proceedings can commence, due to statutory requirements, we must undertake formal identity checks on each director and any Ultimate Beneficial Owner (UBO) of the company (i.e. any shareholder who holds 25% or more in shareholding).

Once you are ready to proceed with the liquidation, an ‘Electronic Search Form’ needs to be completed for each Director and UBO. This search will leave a soft footprint on the individual’s credit report – but it will not affect their credit rating.

We also require one form of Government issued photo identity for each director and UBO, which must be certified by a professional. This form of identity should ideally be a Passport or Driving License. (If there are difficulties in certifying this form of identity, we are happy to set up a video call with the director or UBO to certify this document ourselves.)

A Questionnaire also needs to be completed, which we will supply you with.

Once all the necessary paperwork has been processed, we will arrange a date for the directors to swear a Declaration of Solvency (“DoS”). Upon the company being placed into MVL, the directors are required to attend a local solicitor’s office to swear a DofS. (This can now be done virtually, instead of face-to-face.)

Once the date of the DoS has been agreed, we will prepare the board meeting and general meeting paperwork. This will be uploaded to a Client Portal which enables you to view, upload and store all the documentation relating to your liquidation.

The company will be placed into Members’ Voluntary Liquidation on the date that the DoS is sworn, and the other Liquidation paperwork is signed.

As part of the MVL process, we will write to Companies House, the Gazette, the company bankers, the company accountants, HMRC and company shareholders advising them of the liquidation.

Where applicable, we will request that the company bank account is closed and that the funds held in the account are forwarded onto us as liquidators of the company. The funds will be held in an interest-bearing client account, specific for the company.

We aim to distribute the assets of the company after 35 days from the date of Liquidation.

Why is an MVL tax efficient?

If you want to close your solvent company, entering into an MVL is not the only option to do so. However, it is a very tax efficient way to close a company and distribute the profits to shareholders.

If the directors of a company were to simply dissolve the company (following a period of inactivity) then prior to the dissolution the assets of the company would need to be distributed among the shareholders. Distribution of the assets would be done in the form of dividends and as such would be subject to the normal rates tax a shareholder would pay (e.g. income tax).

If the directors were to enter into an MVL, then instead of paying income tax on the assets they receive, they will pay the lower rate “Capital Gains Tax” of 20%. If the business is eligible then they may even benefit from “Business Asset Disposal Relief” (formerly called Entrepreneurs’ Relief) and pay just 10% tax on any assets they receive.

When deciding which route to take, directors should weigh up the costs of an MVL over dissolution against the likely reduction in tax bill as a result, to find the most cost-effective method to closure.

What is a Creditors’ Voluntary Liquidation?

A Creditors’ Voluntary Liquidation (CVL) is an option available to insolvent companies, allowing them to strike an agreement with outstanding creditors to close the company voluntarily. This is preferable to a compulsory liquidation, which creditors can initiate as a means to retrieve their money. Compulsory liquidations can result in legal consequences for the company directors. Such as disqualification from management positions or personal liability for company debt.

Suppose directors find that their company cannot pay its liabilities as they consider signing a Declaration of Solvency. In that case, they should consider entering a CVL if it is unlikely that the company will become solvent.

However, it isn’t always obvious that a company is insolvent, and so a mistaken Declaration of Solvency can be made. In such cases, the appointed liquidator can convene a creditors’ meeting under the Insolvency Act 1986, allowing the MVL to be converted into a CVL.

Clarke Bell can help you

If you have decided to close your company using an MVL (or a CVL), Clarke Bell can help you.

We have 28 years of experience helping directors to liquidate their companies. We would be very happy to do the same for you.

Contact our experts today and find out how we can help you.