A Members’ Voluntary Liquidation (MVL) is a formal, self-imposed process through which the company directors and shareholders close a solvent company.
As the most tax-efficient way of bringing a company to an end, it is often an option used by directors looking to retire, move aboard, or take a step back from the business.
As a formal procedure, several steps are involved, and a licensed Insolvency Practitioner must be appointed to carry out the process.
For more information on Members’ Voluntary Liquidation, from how the process works to who can apply, let’s take a look at everything you need to know about an MVL in this handy guide.
Members’ Voluntary Liquidation Explained
An MVL is a legal procedure that winds-up a solvent company. Subsequently, the company assets are liquidized; it will cease to trade and be struck off companies’ registrar.
Who can apply for a Members’ Voluntary Liquidation?
Only those solvent companies, meaning they are sustainable, can pay their debts and cover their daily costs can apply for an MVL. Furthermore, the business should have assets worth over £25,000 or more.
This contrasts with other types of voluntary liquidation, such as a Creditors’ Voluntary Liquidation, which is only available to insolvent companies.
To apply for an MVL, the company director must declare that they are solvent, pay all its creditors, pay all its taxes, and meet any contractual obligations.
When does a Members’ Voluntary Liquidation occur?
Here are some common scenarios in which an MVL may be used:
- A company that has a lot of assets but has no future use or purpose. Perhaps the business was opened to reach a particular outcome, and this has been completed.
- The shareholders and/or directors wish to retire and wind-up the company to get money out of the business
- The director is looking to open a new company and wants to get what they can from the existing business beforehand
How does a Members’ Voluntary Liquidation work?
The first step is for the company director to call a meeting with shareholders, 75% of which must agree for the MVL to progress.
The director must have up-to-date financial information, which is required to prepare the Declaration of Solvency. This information needs to accurately reflect the true state of the company’s affair, as submitting false information is a serious offence. The Declaration proves that the company is solvent, can pay its taxes, creditors, and meet any outstanding contractual obligations.
The next step is to appoint a licensed Insolvency Practitioner who will carry out and oversee the process. As a formal procedure, this is a legal requirement.
What is the role of an Insolvency Practitioner?
An Insolvency Practitioner will coordinate and oversee the closure of a company to get the best possible outcome.
The Insolvency Practitioner you choose to work with can greatly impact the liquidation outcome, meaning it’s important to do your research to find the best one for your case.
Members’ Voluntary Liquidation vs. Creditors’ Voluntary Liquidation: What’s the difference?
Although both Members’ Voluntary Liquidation and Creditors’ Voluntary Liquidation are self-imposed, voluntary processes, there is one key difference between the two.
A Members’ Voluntary Liquidation is a route that can only be taken by solvent companies, whereas a Creditors’ Voluntary Liquidation is only open to insolvent companies. This is typically for companies that are no longer sustainable, and therefore, the director and stakeholders have decided to place it into liquidation.
There is also a third route – Compulsory Liquidation. This is not a voluntary process and instead is imposed onto a company. With compulsory liquidation, a company is forced to liquidate by its creditors. This occurs when a company can no longer afford to pay its bills, settle its debts, and a creditor has taken legal action to retrieve payment for what they are owed.
Advantages of Members’ Voluntary Liquidation
There are many reasons a company director may choose a Members’ Voluntary Liquidation. For directors looking to close their company, perhaps because they are taking a step back or moving away, an MVL is an easy way to dissolve the business and quickly free up funds.
Another main advantage to an MVL is that it is an HMRC approved, tax-efficient way to close a company.
This is because any funds taken out through an MVL are subject to Capital Gains Tax rather than Income Tax.
There are additional tax benefits to entrepreneurs that qualify for Business Asset Disposal Relief (otherwise known as Entrepreneurs’ Relief before 6th April 2020.) This will mean you can sell all or part of your company and pay just 10% in Capital Gains Tax on profits over the business’s lifetime. This is capped at a limit of £1 million.
This can lead to huge savings for business directors who would otherwise be charged income tax, set at a rate of 18% at the basic level or 28% at the higher rate.
That’s why thousands of company directors choose to close their business with an MVL each year as a completely voluntary, tax-efficient way of closing a business and freeing up funds.