Solvent Liquidation: A Guide to MVLs

In short:

• Solvent liquidations are possible through a process named members’ voluntary liquidations (MVLs).
• An MVL pools a company’s funds and assets together to distribute among shareholders and creditors before closure.
• MVLs can provide significant tax advantages compared to other company closure options.

 

If you were to imagine a company liquidation, you’d be forgiven for envisaging a business that had run into some financial trouble. That needn’t be the case, however. In fact, many healthy and successful businesses opt for a solvent liquidation as their preferred exit option.

Such liquidations are termed members’ voluntary liquidations (or MVLs) and can provide a tax-efficient way to exit a company. But why do directors choose solvent liquidations, and how do they work? We’ve helped countless directors to close down their healthy companies, and this is what we’ve found.

 

Can a solvent company be liquidated?

Yes. Liquidation is not the sole preserve of insolvent companies, nor does it have to be forced upon a business. As a means of settling bills and tying up loose ends, it’s actually a perfect way to close a company. With funds or appropriate assets available to cover any monies owed to creditors, a solvent liquidation is far more straightforward than an insolvent liquidation.

 

What is an MVL?

An MVL is a members’ voluntary liquidation. This is the formal name for a solvent liquidation.

 

What is the purpose of an MVL?

An MVL provides a liquidation option for solvent companies. It ensures that any closure is performed properly and abides by relevant laws and guidelines. It releases the monetary value of a company’s assets to enable them to pay off creditors and provide shareholders with payments.

 

Why do an MVL?

There are myriad reasons why directors may opt to liquidate a solvent company, but these are the most common causes that we’ve experienced.

Retirement

Some businesses are so dependent on their owner that they cease to exist without them. This is actually something we come across in our business sales division quite regularly. A skilled plumber, for example, might try to sell their business, but without them, there is no business or anything to really sell.

Otherwise, a director may have failed to find anybody suitable to inherit or take over the company.

The business has served its purpose

There are companies that are only ever intended to trade for a set period of time. These can be set up to capitalise on a fleeting trend or event and are closed before they experience an inevitable slump.

Internal disputes

Where there are multiple directors, owners, or shareholders, there is potential for disagreement. In these instances, an MVL can sometimes be used to close a business in order to part ways.

Restructures and streamlining

Conglomerates may decide to cull smaller businesses they own as part of streamlining measures to cut costs.

 

What are the benefits of an MVL?

The main draws for business owners considering an MVL are the large tax advantages and the speed in which the closure can be processed.

Beyond this, the benefits of an MVL are the same as any other liquidation. These include,

• A formal and comprehensive closure that takes care of outstanding issues, meaning that there will be no nasty lingering surprises years down the line.
• The closure being handled by a third-party liquidator means that the owner can take a step back. Even creditor claims are handled by the liquidator.

 

What are the tax advantages of an MVL?

Although policy changes have lessened the amount that directors using an MVL could save, solvent liquidations remain the most tax-efficient way to close a company.

By closing via an MVL, the profits pulled from the liquidated company are taxed as capital gains instead of dividends. Depending on the size of the company, this generally saves some money, and in some circumstances, can make a huge difference to the amount of money directors walk away with.

Capital gains tax is now charged at 18% or 24% depending on the whether the director qualifies for the lower or higher rate. However, many are entitled to business asset disposal relief on those rates, which currently sits at 14% (eventually rising to 18%), whereas the tax paid on dividends can be as much as 39.5% depending on circumstance.

 

 

What is the two-year rule for MVLs?

Because of the tax advantages inherent to MVLs, there are Targeted Anti Avoidance Rules (TAAR) in place.

Effectively this states that after an MVL, directors cannot run or own another similar company for two years.

This ruling is designed to deter business owners from avoiding paying income tax by simply liquidating and taking advantage of the capital gains rate every year.

What defines a ‘similar’ business is, of course, subjective, but reopening a shoe shop as a ‘footwear consultancy’ will certainly raise some eyebrows.

Should it be decided that a business is too close in scope to its predecessor, the capital gains rate will be removed from the previous payout retroactively, and a tax bill will be sent for the difference between this and the income tax rate.

 

 

 

How do you wind up a solvent company?

There are a couple of options open to solvent businesses that wish to close. Smaller firms may find dissolution a useful route to take, but for the majority, an MVL makes the most sense.

A typical MVL involves the following stages:

1. Cease trading
2. Appoint an insolvency practitioner to act as a liquidator (the liquidator acts as an unbiased third party responsible for overseeing the distribution of funds derived from the sale of assets)
3. Prepare a Declaration of Solvency
4. Create a written resolution to wind up the company
5. A notice of liquidation is placed in The Gazette and all creditors are informed
6. Assets are sold
7. Funds are distributed among shareholders and creditors
8. The business is officially dissolved and removed from Companies House

 

What is the cheapest way to close a solvent limited company?

Company closure expert, Paul Turner recommends that smaller companies talk to an advisor before opting for an MVL. He says that “occasionally we receive calls from business owners looking to wind companies up that don’t earn enough to make an MVL worthwhile. In these instances, I’ll often walk them through the process of how to dissolve the company themselves.

“A DIY closure is possible in certain circumstances and is certainly the cheapest option, coming in at around £44. Before anybody rushes off to try to do it themselves though, it’s worth mentioning that this is only recommended for the most straightforward of cases. If there are any creditors or other issues at all, the whole process can quickly get away from a director and potentially land them in hot water”.

 

How long does an MVL take?

Turner says that the length of the time needed is entirely dependent on the complexity of the case. “If there is the need for an asset sale”, he explains, “then this will automatically slow down proceedings. The same is true for a lengthy list of creditors”.

While most are completed within 4-6 months, it’s not uncommon for an MVL to take 12 months to complete if there are a number of complexities to the case.

The simplest MVLs are those that have cash in the bank ready to pay out. We’ve even seen some payments paid out in as little as 8 weeks, though this usually only applies to part of the money held in a company. Liquidators will often keep some back while working on a case just in case an unforeseen issue or creditor presents themselves.

 

Can an MVL be reversed?

Yes, but to do so is a particularly laborious and complex task.

It requires a court order, evidence that a reversal is in the company’s best interests, and less than six years to have passed since the business was liquidated.

It’s very rare for liquidations to be reversed. The process of liquidation is generally considered final.

 

Are you looking for the best way to exit your business?

At Forbes Burton, we offer several exit strategies, with each tailored specifically to your business. Whether an MVL, dissolution, or even a business sale might be best for you, we’ve got you covered.

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Give one of our specialist advisers a ring now on 0800 060 8446, or email advice@forbesburton.com for a free consultation with zero obligation to see how we can help.