It’s fair to say that the insolvency profession has its fair share of three letter acronyms and sometimes it can all seem to be so much gobbledegook. In this post, we’d like to demystify two more and explain the difference.
Members Voluntary Liquidation
If you are looking to voluntarily wind up your company then you may be advised to enter into a Members Voluntary Liquidation or ‘MVL’.
An MVL is suitable when the business is solvent but is likely to not be trading and is largely unwanted and is a method of simply ending the life of the business in a formal manner.
Sole traders have the advantage that when they want to cease trading they can simply stop. This is helpful when they want to retire or is taking a job with another business. Unfortunately, Limited companies are entities in their own right and so there is a legal process that needs to be followed.
The starting point is for all of the shareholders and directors to agree that the company should be wound up. If there are disagreements about this then you will definitely need to be taking advice!
This agreement will have to take the form of a members meeting convened to discuss the winding up of the company and the directors will be required to sign a declaration of solvency, without which an MVL cannot proceed.
Solvency is when a company has enough assets to pay its creditors. In the case of one person and small companies this should be a fairly simple matter and often creditors can be paid off from retained cash within the business although in some cases the assets of the business need to be sold off to raise the funds required.
It’s worth pointing out at this juncture that there are a class of liabilities that may not be immediately apparent, called ‘contingent liabilities’ that have the potential to derail the MVL process. (see below)
Once an agreement has been achieved on winding up, creditors have been paid off and the company is deemed to be solvent then the administrative process can begin.
This is one of those time when something can seem to be fairly simple but when it is best to have an expert in charge.
Winding up a company involves a series of very simple steps that anyone can do but each of them must be done in the correct order and be completed correctly as failure to do this can cause delay or render the whole process null and void.
Eventually, once the process is completed the remaining value in the company is divided up amongst the shareholder (or members) and the company is wound up and removed from the register at companies house.
MVL & CVL – the difference
The whole aim of the MVL is to return the value of the company to the shareholders and this gives a clue as for the difference between an MVL and a CVL or ‘Creditors Voluntary Liquidation’.
With the CVL the aim is to return the value of the company to the remaining creditors and wind the company up and this is done where the business is insolvent rather than the solvent enterprise of the MVL.
In both cases these are procedures that the directors have chosen to enter into as opposed to creditor forced action such as a winding up order and in this respect it is true to say that there is a measure of control that can be exercised by the directors although this is clearly less so in the case of a CVA.
Beware though – an MVL can turn into a CVL if it turns out that the company wasn’t solvent after all. This would mean that a solvency statement was in fact incorrect and the directors can face personal action if this was done with intent to deceive.
We mentioned contingent liabilities earlier and this is one area where there can be a change between MVLs and CVLs.
A contingent liability is where a charge doesn’t exist currently but could do so in the future. For example, the directors may have given a guarantee on a particular piece of work that has the potential to turn into a liability in the future.
A qualified insolvency professional will look at contingent liabilities and ensure that these are dealt with appropriately.
What’s the benefit?
For most companies that get to the MVL stage, the process is purely a matter of convenience. After an MVL the company ceases to exist and so the administrative requirements such as submissions to Companies House and annual tax returns are removed.
There are also some potential tax advantages as the value extracted from the business in this way is subject to capital gains tax rather than income tax and national insurance which would be paid on salary payment for example.
Correctly completing an MVL is an administrative process that, whilst it is recorded on the Companies House register and appears in The Gazette isn’t seen as a business failure and as such has no bearing on the individual directors business reputation.
As we have already seen the process of an MVL can be a fairly straightforward and simple one – but only if it is done in the right way.
Contacting a qualified insolvency practitioner is the first thing to do before starting any form of procedure. This way you can ensure that you have all your ducks in a row and that the process will proceed as you expect.