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The main differentiating factor is whether or not the company concerned is solvent or insolvent. If it is insolvent and does not have sufficient assets with which to discharge all its liabilities, then the only option is a CVL where the company is closed down by realising all the assets and distributing the proceeds to all the company’s creditors on a pro rata basis. A company can only be closed down via a members voluntary liquidation if it is solvent and all creditors can be paid within 12 months of the winding up resolution being passed. The directors need to absolutely confident of this because, once the process starts and the liquidator discovers that it is in fact insolvent, he is obliged to convert the MVL into a CVL. It is very important for directors to also consider contingent creditors such as termination charges on leases and similar agreements, any guarantees provided, pension liabilities or even potential redundancy costs on staff terminations as sometimes these liabilities can turn a healthy balance sheet into an insolvent one .
Assuming that it is not derailed by any of the aforementioned factors, a Members Voluntary Liquidation can go ahead and, once all outstanding creditors have been paid off, all the remaining proceeds of asset realisations can be distributed amongst the members.
Many owner managed and family owned businesses opt to enter Members Voluntary Liquidation when the owners reach retirement age. The process enables time to be spent on appropriate tax planning for the benefit of the individual shareholders. The use of a formal Members Voluntary Liquidation enables the restructuring of a group of companies and the extraction of value to be effected in as tax-efficient manner as possible.
The main advantage of a Members Voluntary Liquidation is that taxation is applied as if distributions were of a capital rather than an income nature. Such capital distributions should be more lightly taxed than if the funds were extracted as dividends outside of an MVL procedure. Owners of trading companies are generally eligible for entrepreneur’s relief meaning that capital gains are only charged at 10% as opposed to up to 20% provided the gains are less than £10 million. Even if a company is not eligible for entrepreneur’s relief, because, for example, it is deemed to be a property or simple investment vehicle, a members voluntary liquidation may still yield tax benefits depending on the tax bands of the individual owners concerned.
With tax legislation continually changing, company shareholders need to take up to date advice about the tax and other implications of a Members Voluntary Liquidation and, if you have any questions on the subject, we would be only too pleased to assist. You can contact our specialist business recovery team here.
David Birne, Business Recovery Partner
T 020 7380 4908