When you’ve worked hard to build a successful business, often over many years, stepping away is rarely a simple decision. Whether you’re planning for retirement, restructuring a group of companies or bringing a company’s lifecycle to its natural close, it is important to ensure that the process is clean, tax-efficient and managed in a professional manner.
For many company directors, a solvent liquidation, formally known as a Members Voluntary Liquidation (MVL), provides just that.
In this guide, we will explain what an MVL is, when it’s appropriate, how the process works, and the benefits that it can offer.
What is a solvent liquidation?
A solvent liquidation, being an MVL, is the formal process used to close down a company that has been profitable and is anticipated to hold assets or funds at closure.
Unlike insolvent liquidations, which are driven by financial distress, solvent liquidation is a positive, director-led decision, made with the intention to:
- Extract company funds in a tax-efficient manner.
- Distribute surplus assets to shareholders.
- Bring the company to an orderly end.
- Provide legal, financial and administrative clarity to all involved.
Solvent liquidations must be handled by a licensed insolvency practitioner, even though the company is not insolvent. The licensed insolvency practitioner’s role is to realise company assets, settle liabilities and distribute remaining funds to shareholders.
When is an MVL the right thing to do?
The company has reached the end of its useful life
For many directors, there may come a natural point whereby the business has run its course. The business may no longer be trading, its objectives may have been reached, or personal circumstances may have changed. In these situations, an MVL provides a clean, structured and tax-efficient way to bring the company to an orderly close.
Most commonly, this applies when:
Business owners wish to retire
If directors wish to step away at the end of their working life, an MVL allows for the efficient extraction of profits and ensures that all outstanding liabilities have been paid prior to winding down the company.
For many retiring directors, this allows for financial clarity and peace of mind.
Company directors wishing to return to employment
In instances whereby a limited company was set up for consultancy or contract work, it is possible that directors ultimately choose to re-enter employment. When the company is no longer required and retained earnings want extracting, an MVL provides a structured way to wind down.
The business model is no longer relevant
As markets evolve, technology changes to economies shift, it may be that a company that once thrived now operates within a challenging sector and directors wish to pivot away. If it remains solvent and holds cash or assets, an MVL allows for a return of value to shareholders without unnecessary ongoing costs.
Group structuring
In many businesses, a company may be part of a wider corporate group of companies. In such situations, it is possible that, over time, certain companies within the group will lose their strategic relevance. An MVL provides a controlled and efficient way to streamline group operation by closing redundant companies.
Key examples of MVLs being used in group restructuring include:
Redundant subsidiaries:
In instances where a subsidiary has served its purpose, such as holding intellectual property or operating in a niche market, an MVL allows directors to formally close that entity and settle liabilities rather than allowing it to sit dormant.
Simplifying corporate structure
Over time, as businesses grow and groups acquire new companies, group structures can grow complex. This can create administrative burden, increased regulatory obligations and inefficient tax costs.
Winding down non-essential companies within a group through an MVL can reduce compliance requirements, streamline reporting and simplify bookkeeping.
Preparing for merger or sale
When a group is preparing to merge or sell, it may be beneficial to first tidy up the corporate structure. An MVL can remove inactive companies, making the group more attractive to potential buyers and reduce the chances of post-sale complications.
Cessation following the sale of a business
Once a company has sold off its trade and assets, what’s left behind is typically a cash-rich but operationally inactive business. In these circumstances, an MVL is commonly the most efficient and straightforward way to bring the company’s operations to a close while extracting the sale proceeds in a tax-efficient manner.
If the trade, assets and sometimes employees of a business have been transferred to a buyer, the original company still exists as a legal entity with no ongoing purpose. The dormant business often contains significant amounts of cash following the sale, despite no longer operating as a business. An MVL enables directors to extract those funds and distribute them to shareholders in a compliant fashion.
What are the key benefits to a solvent liquidation?
Undertaking a solvent liquidation has many benefits, including enhanced tax efficiency, quick and efficient distribution of retained cash and legal certainty.
Enhanced tax efficiency
For many shareholders, the tax treatment and distribution of assets is the main benefit. An MVL commonly results in a significantly lower tax bill compared to withdrawing funds as income or dividends.
Quick and efficient distribution
Funds can often be distributed to shareholders soon after assets are realised, frequently via an initial payment within a matter of days after the liquidation date.
Legal certainty
Once the MVL is complete, the company is formally dissolved, providing complete legal reassurance and final clarity.
How the MVL process works
Now, we will break down the entire process into a step-by-step overview so that you know exactly what to expect through the process:
1. Preparatory review
Together with your accountant, gather key financial information, ensure that liabilities can be settled, and confirm that the company is solvent.
2. Declaration of solvency
Directors sign a statutory declaration, declaring that company’s ability to settle debts within 12 months. This must be sworn by a solicitor.
3. Shareholder resolution
Shareholders pass a special resolution to place the company into a Members’ Voluntary Liquidation.
4. The appointment of an insolvency practitioner
A licensed insolvency practitioner is formally appointed as liquidator. From this point, they take control of the company’s affairs.
5. Realisation of assets
The realisation of assets typically occurs prior to liquidation. However, a licensed insolvency practitioner can assist at this point if required. This stage includes the realisation of:
- Bank balances.
- Debtors.
- Property or equipment.
- Intellectual property, if relevant.
6. The Settlement of Liabilities
All outstanding creditors, including HMRC, are paid in full. This must occur within 12 months of the liquidation date and is a strict deadline.
7. Distribution to shareholders
Any remaining funds once liabilities have been settled are distributed, often in stages. For many shareholders, this is where the tax advantages of the MVL process apply.
8. Final meeting and dissolution
Once all matters are concluded, the liquidator files final paperwork and the company is dissolved at Companies House. At this point, the company ceases to exist as a legal entity.
How long does an MVL take?
The majority of MVLs are completed within 3-8 months, with initial distributions being paid within the first few weeks. However, this timeline may vary depending on the complexity of the company in question, with properties, outstanding tax matter or complex assets potentially extending the timeline.
How Can Cooper Associates Accountancy help?
If you’re considering a Members Voluntary Liquidation or simply wish to explore whether or not an MVL is the right option for you, our team of experienced insolvency experts are on hand to help.
Our team take the time to gain a full and competent understanding of your business’s unique situation, helping us to provide help tailored to your goals and aspirations.
Get in touch today for clear, bespoke and expert advice and discover how we can help you through a zero-obligation initial consultation with our team.
Frequently Asked Questions
Do I need an insolvency practitioner if my company is still solvent?
Yes. Only a licensed practitioner can act as a liquidator in an MVL.
Can the company continue trading during an MVL?
No. All trading must have ceased prior to entering the process.
What if a liability appears once the MVL has started?
Your licensed insolvency practitioner will ensure that all claims are dealt with correctly, regardless of when they appear.
How much tax will I pay?
Your tax liability depends on your circumstances, including Business Asset Disposal Relief (BADR) eligibility (please speak to your accountant regarding your eligibility). We will work closely with your account to ensure the most tax-efficient outcome possible for you.
