Are you Thinking of Closing Your Company Down?

If your company is solvent and you have reached the stage where, for whatever reason you either cannot or do not want the sell it and just want to close it down, then a process called Members Voluntary Liquidation (MVL) could be the right route for you.

This article looks at how you can go about closing your Company down to maximise the value of the surplus funds which it holds.

The Benefit of a MVL

Cutting to the chase, the usual core benefit to the owners of this route is to reduce an individual’s tax burden from a capital distribution, which is surplus cash held within the business, from 28% to 10%.  This is achieved through a scheme called Entrepreneur’s Relief. This relief is available on up to £10 million of lifetime gains arising from 6 April 2008 and can deliver an individual a tax saving of up to £1.8million.

A MVL can be used if the following conditions are met.

1. A majority of the directors, or all of them if there are only two, must swear a statutory Declaration of Solvency.
2. This confirms that the company is solvent and has sufficient assets to pay all its liabilities and the costs of the liquidation within a period not exceeding 12 months.
3. This will include the distribution of the surplus funds to the shareholders.
4. 75% of shareholders agree to the MVL.  This is done either by written resolution or at a shareholders winding up meeting.
5. The shares must be held in a trading company or in the holding company of a trading group.
6. The person applying must be an officer or employee of the company or a company within the same group and must own at least 5% of the company’s ordinary share capital and be able to exercise 5% of the voting rights within the company.

This route is likely to have financial benefits over using a method that would incur income tax.

There are a number of other reasons why a MVL might be appropriate, these include the following which we list below and you might wish to research further information

• There might be several shareholders that are looking to divide the company’s assets

• If the Company is no longer required as they are now reverting to full time employment
• As a process to re-organise a group of companies

There can be significant benefits for the directors from using a MVL at an earlier stage.  These include:

• Initial and subsequent distributions can be soon after the Liquidator is appointed. In some cases the following day
• The liquidator becomes responsible for dealing with the closure, dealing with VAT deregistration and corporation tax returns, and responsibility for the company’s records.
• The directors’ powers cease upon the appointment so no more executive responsibilities
• A company entering liquidation is still obliged to file accounts at Companies House.
• The liquidator can deal with any remaining assets and agree and settle the liabilities
• The liquidator can distribute an asset direct to shareholders without first having to sell it. This is a method often used when property is involved.
• The company will be dissolved automatically three months after the liquidator has filed notice at Companies House that the liquidation has been finished.
• The records of the company may be destroyed six years after dissolution has taken place.

The Steps to MVL

 

1.Decison The first action is that the directors resolve the company should close and to appoint an Insolvency Practitioner to assist. Although it is a solvent liquidation, statutory requirements are that only an Insolvency Practitioner is authorised to act in such cases.

 

2. The Board Meeting Depending on the Articles of Association a winding up resolution can either by passed at a meeting of the company’s shareholders or alternatively by written resolution. 

 

3. Declaration of Solvency This is a key document that lays out the Company’s financial position, assets and liabilities, and confirming that it can pay its creditors in full within a year.  This is signed by the directors in the five weeks before the winding up resolution is passed.  There is a set format for this declaration and once the Liquidator has been appointed it will be filed at Companies House.

 

4. Shareholders Meeting If the Directors prefer to wind up the company by virtue of written resolutions, then the shareholders will be sent notice of the proposed resolutions. The notice will request that shareholders vote in favour or against the proposed resolutions.

The resolutions will include:

• The formal winding up resolution;
• Appointment of a liquidator and agreement to their costs and expenses
• Agreement to distribute certain assets in their present form, rather than selling them and distributing the cash proceeds.

If the written resolution route is chosen, then the liquidation date is deemed to be when notices of consent by 75% of the shareholder are received.  Alternatively, if a shareholders’ meeting is held then liquidation takes place when the resolutions are passed.

5. Company in Liquidation Once the company is in liquidation, the liquidator will need to deal with the formalities of appointment for example filing of various forms at Companies House, advertising to all creditors to submit claims; and declaring and paying dividends to all creditors in full plus statutory interest.

6.Final Meeting

Once the liquidator has obtained tax clearances from all Government departments and ensured that there are no further claims from any other creditor, the Liquidator will take steps to close the case.

Next Steps

While the benefits offered by a Members Voluntary Liquidation can be very attractive the process can seem daunting.  The right experienced insolvency practitioner can hold your hand through every step of the process from start to finish including the preparation all of the necessary documentation. 

If you would like to talk to us about this or any other financial issues that are worrying you or have any questions about this topic then please email me at vee@navigatebr.com or call on 0330 236 9930, 0330 236 9938 and 07961 116321.