Members’ Voluntary Liquidation (MVL)

A Members’ Voluntary Liquidation (MVL) is a formal liquidation process which winds up the affairs of a solvent company, and allows directors and shareholders to extract the value tied up in the business in both a tax-efficient and cost-effective manner.

MVLs are often utilised by contractors and directors of profitable and successful businesses either as part of a retirement strategy or simply a desire to move onto a new venture and reap the financial rewards of their hard work. MVLs represent a swift and orderly way of tying up the loose ends of a company before distributing the assets and cash.

It must be stressed that an MVL is only suitable for solvent companies – that is those for whose assets outweigh their liabilities. As part of the MVL process, shareholders will be required to sign a declaration of solvency to attest that the company is indeed solvent; falsely swearing a declaration of solvency is considered an act of perjury and the consequences of this can be severe.

If you believe your company is insolvent, or is at risk of insolvency, you will need to consider an alternative process such as a Creditors’ Voluntary Liquidation (CVL).

As a formal liquidation procedure, an MVL must be handled by a licensed insolvency practitioner. As the name suggests, an MVL is a voluntary process which means shareholders can appoint the liquidator of their choice and ensure the company’s affairs are brought to an end at a time which is practical and convenient on both a personal and a business level.

The liquidator is appointed at an extraordinary general meeting (EGM) and requires 75% of shareholders to grant their approval to this course of action. Following appointment, the liquidator will go about realising company assets and settling any outstanding creditor claims. The company’s funds will then be distributed to shareholders, along with any assets that are being distributed in specie rather than in their liquidated form.

One of the major benefits an MVL has over other company closure options is that distributions made via this process are treated as capital rather than income. This means the funds are subject to Capital Gains Tax (CGT) rather than income tax; this can significantly lower the tax levied on the distributions and increase returns to shareholders as a result.

In many cases, directors can also take advantage of Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief. This is a tax relief scheme which cuts the effective rate of CGT in half, down to just 10% (subject to an individual lifetime limit of £1m worth of gains). For many companies, a solvent liquidation represents the most cost-effective way of releasing funds from a business which is no longer required.

If you are considering closing down your limited company, now or in the near future, it is wise to contact an insolvency practitioner ahead of time. This allows for an appropriate exit plan to be devised, giving you a clear route forward and the ability to plan your next move backed up by a solid strategy.

Taking advice in advance means you will have a liquidator lined up and ready to go when the time is right, ensuring that your company is in an optimal position and ready to go when you decide to initiate the MVL.

Depending on the value of the cash and assets in your company at the time of closure, you may be able to consider strike off as an alternative. Striking off a company – sometimes known as company dissolution – is an informal way of closing down a company which does not require the input of a licensed insolvency practitioner.

However, you should bear in mind that strike off is not right for every company. Any funds released during a company strike off process will be treated as income, and therefore the rate of tax levied on the distributions will be higher than they would if taken out via an MVL.

If you have in excess of £25,000 to distribute to shareholders, it is likely that an MVL will be a more cost-effective way of extracting these funds.

With over 100 licensed insolvency practitioners working across our nationwide network of offices, Begbies Traynor can provide you and your company with the help and support it needs if you are considering your company closure options. Call our team today to arrange a free no-obligation consultation.