Members Voluntary Liquidation
Quite often, a company which is perfectly solvent and has assets greater than its liabilities has reached the end of its useful life. Perhaps the directors/shareholders want to retire and have nobody to take over from them; perhaps the company has a contract which is coming to an end with no prospect of renewal; there could be any number of reasons. Company law and tax law do not allow the directors or shareholders simply to help themselves to the assets. The company must be disposed of in a recognised manner. In very straightforward cases it used to be possible to obtain clearance from the Inland Revenue under a concessionary regulation (C16) to pay any debts that the company has, return the surplus to the shareholders and ask the Registrar of Companies to strike it off the register. With effect from 1st March 2012 however, any amount in excess of £25,000 distributed without a formal liquidation is treated as a distribution of income rather than capital. If the company’s net assets are more than £25,000 therefore, or its affairs are complicated, then it may be beneficial or necessary for the company to be put into Members Voluntary Liquidation. Before doing so it will be necessary for a majority of the directors to swear a Declaration of Solvency, which is an affidavit confirming that all creditors and the costs of Liquidation can be paid in full within 12 months. If they are not able to make that declaration then the Liquidation must be a Creditors Voluntary Liquidation (see Insolvent Liquidations).
If the shareholders receive net assets in excess of £25,000 from the company without it going into Liquidation then all the money is deemed to be income in the hands of the recipient and income tax at marginal rates will become payable. It is of course possible in some cases for the company to buy back its shares which is another way of creating a capital gain.
Prior to 14th October 2011 the Treasury Solicitor’s policy was to take legal proceedings against the shareholders to confiscate any distributions under C16 if they exceeded a £4,000 de minimis figure. That policy has now been scrapped.
In summary if the net assets less the share capital are under £25,000 the Voluntary Strike Off is still a very useful and cost effective way of getting capital gains treatment for what would otherwise be distributable income. For larger cases it will almost always be much more beneficial to use a Members Voluntary Liquidation instead.
Reconstruction (section 110)
Sometimes a family company may have passed down the generations or, for other reasons, have two or more distinct sections of directors and shareholders, each dealing with their own part of the business and they may want to split the business and go their separate ways.
Very often, particularly if it is an old family company, there may be substantial tax liabilities arising from breaking the company into its different parts and selling or giving them to the different factions. Under these circumstances it is possible to use a Members Voluntary Liquidation as a means to distribute the various parts of the business, through new companies, to the respective shareholders without giving rise to any tax liabilities. The Insolvency Act 1986 s110 allows a liquidator to distribute assets in this way “in specie”, provided that the Inland Revenue first give clearance, which they will normally do provided that the reconstruction is for commercial reasons rather than simply as a way of avoiding or delaying a genuine tax liability.
The Mechanics of the Liquidation
Once the directors and shareholders have decided that a members voluntary liquidation is appropriate for their circumstances a meeting of shareholders must be called. This will require 14 or 21 days’ notice, depending on the company’s Articles of Association unless 90% of the shareholders agree to a shorter period of (or no) notice. The notice must state the purpose of the meeting.
Before the meeting, but not more than 5 weeks before, a majority of the directors, or all of them if there are less than three, must swear a Declaration of Solvency stating that the company is capable of paying all its creditors in full, within 12 months with statutory interest (currently at 8%) and the costs of the liquidation.
When this has been done the shareholders may then pass a Special Resolution (which requires a 75% majority) to put the company into Members Voluntary Liquidation. They will then pass an Ordinary Resolution (which requires only a simple majority) to appoint a liquidator who must be a Licensed Insolvency Practitioner.
Once this is done the powers of the directors cease and the liquidator will then take steps to liquidate the company either by selling the assets, paying any creditors and distributing the surplus to the shareholders, or carrying out a pre-agreed reconstruction. Sometimes it is possible for a liquidator to distribute assets “in specie” to shareholders if there is some particular reason why they might want the assets rather than the cash.
If the liquidation lasts longer than a year the liquidator must send a progress report to the shareholders.
If, at any time within the period specified in the Declaration of Solvency, a maximum of 12 months, it becomes apparent to the liquidator that he will not be able to pay the creditors in full then he must call a meeting of creditors and convert the liquidation into a Creditors Voluntary Liquidation (see Insolvent Liquidations).
When the liquidation is finalised the liquidator will send a final report and call a final meeting of shareholders to explain the outcome. The company will then be dissolved three months later.