A guide to members' voluntary liquidation (MVL)

What is a members’ voluntary liquidation (MVL) and when can one be used? Licensed Insolvency Practitioner, Wayne Harrison of KSA Group, explains the complexities and benefits of an MVL.

What is a members’ voluntary liquidation (MVL)?

A members’ voluntary liquidation (MVL) is the formal process to bring a solvent company to a close. MVLs are only available for solvent companies and the directors are required to make a sworn declaration that the company:

is solvent
can pay all its taxes
can pay all its creditors
can meet all its contractual obligations

This includes its future liabilities that have yet to crystallise and will normally include closing the company’s accounts with HMRC by preparing and filing any PAYE/NIC, VAT and Corporation Tax returns and paying any outstanding balance. It may also include settling any long-term contractual liabilities, such as leases and finance agreements.

Once the directors are reasonably certain that the company will be able to meet all obligations before proceeding with an MVL, a shareholders/members’ meeting is convened to appoint a licensed insolvency practitioner as liquidator. The liquidator will then:

realise the company’s assets
settle any legal disputes
pay any outstanding creditors
distribute the remaining surplus funds to the company’s shareholders/members

Once the liquidator has completed these formalities and received clearance from HMRC, the company will be dissolved and formally removed from the companies register.

What is the differences between a creditors’ voluntary liquidation (CVL) and a members’ voluntary liquidation (MVL)?

Most companies that are placed into liquidation are those that have been unsuccessful and can no longer continue because they are unable to pay the monies that they owe to creditors. In these circumstances, the directors and shareholders will place the company into voluntary liquidation, known as a creditors’ voluntary liquidation (CVL), or a creditor will take legal proceedings to have the company wound up, known as a compulsory liquidation. Most notably, HMRC will petition the court for a company to be wound up compulsorily when a company has failed to pay outstanding taxes and HMRC has been unable to reach an agreement with the company.

However, the liquidation process can also be used to bring a company to a close when it is not in financial distress. There may come a time when a company has come to the end of its life and the directors and shareholders wish to close the business and formally wind up its affairs. In such circumstances, a members’ voluntary liquidation (MVL) may be the answer.

Why use a members’ voluntary liquidation (MVL)?

An MVL is usually a good option for a solvent company which has naturally reached the end of its life. Circumstances can include when:

a company was set up for a specific purpose or contract and that has been completed
the business has become outdated and is now redundant
the directors/owners wish to retire and there is no one to take over the running of the business

What is the process for a members’ voluntary liquidation (MVL) and how can one be arranged?

Only a licensed insolvency practitioner can be appointed as a liquidator for an MVL and you will need to speak to one who will explain and guide you through the process. In general terms, the starting point for proceedings with an MVL is that the company must:

have completed its business and ceased to trade
anticipate having surplus funds left once all creditors have been paid
have deregistered or be in the process of deregistering for VAT, PAYE/NIC and Corporation Tax
have filed or be in the process of completing and filing accounts and returns up to the date the business ceased trading
be able to pay any unpaid creditors within 12 months of the start of a liquidation

The MVL process is then as follows:

The directors make a statutory declaration that the company is solvent. To do this, a closing financial statement must be prepared and must be sworn before a solicitor or notary. Where the company has more than one director the statement must be sworn by all or a majority of the directors.
Once the statement has been sworn by the directors, and within five weeks of the declaration, a meeting of the company’s shareholders must be held. At this meeting the shareholders/members will be asked to pass a resolution to agree to the company being placed into liquidation and to appoint a liquidator.
As mentioned above, the appointed liquidator must be a licensed insolvency practitioner. Once the formalities of the meeting are concluded, the appointment will be published in the The Gazette.
At this stage, the liquidator takes control of the company and the directors’ executive powers cease. The liquidator will realise the company’s assets, settle any creditor claims and distribute any surplus funds to the shareholders/members.
A company’s assets can be distributed in specie to shareholders/members, thereby alleviating the need for them to be sold.
Any creditor claims that are paid after the liquidation commences will be entitled to receive statutory interest in addition to the amount owed by the company. This is currently 8% and is applied from the date the liquidation commences.

Does a members’ voluntary liquidation (MVL) offer tax benefits for shareholders?

The primary benefit of a liquidation is to bring a company’s affairs to an orderly closure by appointing a liquidator to deal with the formalities and for the company to be removed from the companies register or dissolved. In an MVL, the liquidation should also result in an expeditions distribution of the surplus funds to the shareholders/members. In addition, any distribution to the shareholders/members may have certain taxation benefits for them.

Dividend distributions in an MVL are usually classified as a Capital distribution rather than an Income distribution and would therefore be subject to Capital Gains taxation. This has lower taxation rates than income tax, especially with the availability of the reduced rate provided by Entrepreneur’s Relief. It should be noted, however, that Entrepreneur’s Relief is subject to certain qualifying criteria. It is not available to every company and its continued existence and criteria were the subject of discussion during the recent UK general election. It is therefore likely that there will be forthcoming changes to the qualifying criteria and the possibility that the relief will be removed altogether.

Ultimately, the availability of any taxation relief will be dependent upon the shareholder’s circumstances and the prevailing taxation criteria at the time of any distribution. But whilst there may be taxation benefits for shareholders/members, the main purpose of the liquidation should not solely be for this purpose. Indeed, HMRC have Targeted Anti Avoidance Rules (TAAR) (introduced in the Finance Act 2016) that allows it to challenge liquidation shareholder distributions where it considers that the main purpose of the liquidation was to avoid tax.

An example of this is where a company is liquidated, and the shareholders decide to recommence a similar business or trade within a two-year period following the liquidation. In these circumstances, HMRC may consider that the main purpose of the liquidation process was to avoid tax and it could seek to re-classify any distributions as subject to income rather than capital gains taxation.

About the author

Wayne Harrison is a licensed insolvency practitioner who has over 25 year's insolvency experience helping companies in all sectors. Wayne is the director in charge of the London Office of KSA Group. Prior to him joining KSA Group in 2009 he was appointed by the IPA to oversee the regulation of insolvency practitioners. Wayne is a contributor to Company Rescue. For more information on members’ voluntary liquidations, click here.

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Publication date: 12 February 2020