What is a Solvent Liquidation?

NEWS & BLOG

NEWS & BLOG

If you are looking to retire or you want to exit from your business for another reason, then the best way to do this is through a Members’ Voluntary Liquidation (MVL). This is the formal process for closing down a solvent company in a cost effective manner.

The most important thing to note if you want to close your company through an MVL is that it has to be solvent. This means it must be able to settle all its liabilities (both known and contingent) in full within 12 months. If your company isn’t able to do this, then speak to an Insolvency Practitioner about other options that are available.

Why can’t I just dissolve my company?
Dissolving a company is a simple process whereby you submit the relevant form to Companies House and pay the small fee. Notice of your intention to dissolve will be advertised in the relevant Gazette, and, as long as no objection is received, the company will be struck off two months later.

Since 2012, if the value of your company’s balance sheet is less than £25,000, then striking off the company could be a cost effective solution, subject to the other considerations set out in this blog, as any distribution below this level can be treated as a capital gain as opposed to a form of income.

However, there are a number of disadvantages to dissolution. For more information on dissolution and the issues surrounding this process, read our Guide to Dissolution.

If the company’s assets exceed £25,000, then it is imperative that the affairs of the company are handled in the correct way and wound down with the help of an experienced licensed Insolvency Practitioner. Working in conjunction with your accountant and your personal tax advisor, they will be able to assist you in unlocking the value retained within a company, taking advantage of beneficial tax savings that are available.

The cost of an MVL
An MVL can only be commenced with the assistance of a licensed Insolvency Practitioner. You cannot do it yourself. It is a formal process that is governed by the Insolvency Act 1986 and the Insolvency (England & Wales) Rules 2016.

Accordingly, the main cost of entering an MVL will be the fee charged by the Insolvency Practitioner for acting as the liquidator, together with the expenses that they will incur in discharging their statutory duties. These expenses are known as disbursements and mainly cover the items like placing legal notices in the Gazette and taking out an insurance bond.

After discharging any outstanding liabilities and the costs of the process, the remaining funds can be distributed to shareholders. One of the key benefits of an MVL is that these distributions are subject to Capital Gains Tax rather than income tax. In the majority of cases, this is deemed as a much better option than taking the funds as dividends (i.e. a form of income), and it is this tax saving which makes MVLs a popular choice, particularly if large sums of retained profits are involved. It is also worth noting that the tax saving is normally far greater than the costs that are likely to be incurred too.

Preparing for an MVL
If you are considering placing your company into an MVL then it is always best to prepare your business for the process. A priority is to ensure you get your company into as simple a state as possible. This will both improve the chances of your company qualifying for this type of procedure, as well as making the whole process run more smoothly.

In addition, it is best to make sure liabilities are paid, any debtors are collected, and all HMRC obligations including the submission of accounts are up to date. These simple tasks will help to avoid any statutory interest being incurred and keep the costs of the MVL to a minimum.

What happens during an MVL?
If you wish to start this process, it will commence with a thorough assessment of the company’s financial position. This is to determine if there will be enough surplus funds remaining in the business once its liabilities are cleared. You will then have to sign a Declaration of Solvency stating that your company can settle its liabilities within a period no greater than 12 months. Falsely signing this declaration, when you know the company is insolvent, is a criminal offence and can lead to a fine and up to 2 years imprisonment.

From this, a general meeting of shareholders will be held to consider the appointment of a liquidator. As long as 75% of shareholders agree to the MVL, the company will enter liquidation and the appointed Insolvency Practitioner will take control of the company’s affairs.

How quickly will the shareholders get paid?
In most straightforward cases, the MVL process is typically completed and the company formally closed within 6 – 9 months. Any delays in concluding a liquidation often are as a consequence of the delays in receiving formal tax clearance from HMRC. However, subject to certain criteria being met, here at BLB Advisory we often get the initial distribution to the shareholders within 7 business days following our appointment.

If you are considering closing down your solvent company, then please speak to one of our experienced team members at BLB Advisory. Whilst it is often a simple process, it’s still very important to do it correctly.