A solvent liquidation can provide an orderly way to close a company that has finished trading but still holds cash, investments, property or other assets.
The formal procedure is known as a Members’ Voluntary Liquidation. It may be suitable where the shareholders are retiring, the business has been sold, a particular project has ended or the company is no longer required.
At Navigate Business Recovery, we help directors and shareholders decide whether a Members’ Voluntary Liquidation is the right route, identify any problems that need resolving first and prepare the company for the formal process.
Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation is available where a company is solvent and able to pay all its debts, together with interest, within no more than 12 months from the start of the liquidation. A licensed insolvency practitioner is appointed as liquidator to settle the company’s affairs and distribute the remaining assets to its shareholders.
It is commonly used where a successful company has stopped trading but has retained profits or other valuable assets that need to be distributed before the company is closed.
An MVL may also be appropriate following a business sale, the completion of a property development, the retirement of an owner or a company reorganisation.
Is the Company Genuinely Solvent?
Before considering an MVL, the directors need to establish that the company can pay everything it owes.
This means looking beyond the money currently sitting in the bank account. The company may also have Corporation Tax, Value Added Tax, PAYE, employee liabilities, lease commitments, professional fees, warranties, disputed claims or other obligations that have not yet fallen due.
The directors should also consider whether any claims could arise after the company stops trading. A company may appear solvent on paper but still face an uncertain or contingent liability.
Where there is genuine doubt about whether every creditor can be paid in full, the position should be investigated before the liquidation begins.
Declaration of Solvency
The directors must make a formal Declaration of Solvency before the shareholders resolve to place the company into an MVL.
By signing it, the directors confirm that they have made a full enquiry into the company’s affairs and believe it will be able to pay all its debts, together with interest, within the stated period.
The declaration must include a statement of the company’s assets and liabilities. It is not simply an administrative form. A director who makes the declaration without reasonable grounds may face serious consequences.
For that reason, the company’s accounting records should be current, and the figures should be tested carefully before anything is signed.
What Happens During the Liquidation?
Once the Declaration of Solvency has been made, the shareholders pass the necessary resolution and appoint a licensed insolvency practitioner as liquidator.
The liquidator takes control of the company’s affairs, deals with any outstanding liabilities and distributes the remaining funds or assets to the shareholders.
Some distributions may be made shortly after the liquidator is appointed, while further amounts may be retained until HMRC, professional costs and any other liabilities have been finalised.
When the liquidation is complete, the company is dissolved and removed from the Companies House register.
Cash, Property and Other Company Assets
A company entering an MVL may hold more than cash.
Its assets might include property, shares, investments, intellectual property, vehicles, equipment or money owed by customers and connected companies.
These assets do not always have to be sold before they can be distributed. In suitable circumstances, the liquidator may be able to transfer an asset directly to a shareholder. This is often referred to as a distribution in specie.
Any proposed transfer should be considered before the liquidation begins so that valuations, ownership documents, tax consequences and any necessary consents can be dealt with properly.
Director’s Loan Accounts
A director’s loan account should be checked before the company enters liquidation.
Where the director owes money to the company, that balance remains a company asset. It does not automatically disappear because the company is closing.
The balance may need to be repaid or dealt with as part of the eventual shareholder distribution. The correct treatment will depend on the accounting records, the available assets and the director’s wider tax position.
Unexplained drawings, personal expenses and unsupported dividends can also affect the final balance, so the figures should be reviewed rather than simply accepted at face value.
Tax Treatment of Distributions
One attraction of an MVL is that distributions made by the liquidator may be treated as capital rather than ordinary dividend income.
However, the tax position is not automatic and will depend on the circumstances of the company and its shareholders.
Particular care is needed where a shareholder intends to continue the same or a similar business after the company has been wound up. HMRC’s targeted anti avoidance rules can, in some circumstances, treat a liquidation distribution as income rather than capital.
Tax advice should therefore be obtained before the liquidation begins, not after the money has been distributed.
Members’ Voluntary Liquidation or Strike Off?
A company that has stopped trading may also be able to apply for voluntary strike off.
Strike off is generally simpler, but it may not be the best option where the company holds substantial funds or other assets, where liabilities remain unresolved or where a formal liquidator is needed to bring the company’s affairs to an orderly conclusion.
There can also be different tax consequences depending on the amount distributed and the route used.
Any assets left in the company when it is dissolved may pass to the Crown as bona vacantia, so everything should be dealt with before a strike off is completed.
The cheapest route is not always the safest or most tax efficient route.
Preparing the Company for an MVL
Good preparation can prevent the liquidation becoming slower and more expensive than expected.
The company’s accounts and tax returns should be up to date. Outstanding debts should be collected where possible, liabilities should be identified and any disputes should be addressed.
The directors should also establish what assets the company owns, whether any security is registered over them and whether anything is held jointly or on behalf of another person.
If the company is part of a group, intercompany balances and shared assets should be examined before the liquidation begins.
How Navigate Business Recovery Can Help
We help directors and shareholders assess whether an MVL is the right way to close the company and whether the business is genuinely ready for liquidation.
This can include reviewing the company’s assets and liabilities, identifying possible tax or creditor issues, examining director’s loan accounts and helping to resolve matters that may otherwise delay the process.
We can also liaise with the company’s accountant, tax adviser and proposed insolvency practitioner so that the directors understand what is required and the formal liquidation begins on a properly prepared basis.
Navigate Business Recovery does not accept appointments as liquidator. Where an MVL is appropriate, a licensed insolvency practitioner will need to conduct the formal process.
Why Early Planning Matters
A solvent liquidation is usually easier where it has been planned in advance.
Leaving matters until the company has already stopped trading can uncover missing records, unresolved tax liabilities, forgotten assets or disputes that delay distributions to the shareholders.
Early planning gives the directors time to establish what the company owns, what it owes and how its remaining assets should be dealt with.
How We Can Help
Navigate Business Recovery can provide independent guidance on whether a Members’ Voluntary Liquidation is suitable, help identify any issues that should be dealt with before the process begins and assist directors and shareholders in preparing the company for closure.
Where a Members’ Voluntary Liquidation is the right option, we can also introduce you to an appropriately licensed insolvency practitioner who can carry out the formal liquidation process.
Next Steps
If you are considering closing a solvent company and would like to understand whether a Members’ Voluntary Liquidation is the right option, you can book a meeting with Vee here:
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