A Members Voluntary Liquidation would be used under the following circumstances:
- The retirement of the Shareholder as there is no one for succession purposes or the company cannot be sold to any third party.
- The shareholders have fallen out and wish to separate, thereby, wishing to take advantage of transferring assets without having to find the cash to buy them.
- The company is solvent but the Liquidity/Cash flow is not there and the creditors are threatening Compulsory Winding Up.
- Tax Advantages i.e. Capital Gains Entrepreneurs Relief, if a company is a trading company and the distribution is less than £1m or 18% after 06.04.08 as opposed to higher rates of tax on Dividends. A company can make an application to the Revenue under special concession to allow it to distribute assets which will allow the distribution to be treated as capital rather than a dividend distribution. Additionally, as from 1 October 2008 new company law enables companies to make capital reductions as long as the decision is supported by a Solvency Statement signed by all directors.
The basic procedure for this type of liquidation is as follows:
- The directors swear a Statutory Declaration of Solvency and convene a meeting of members.
- At the meeting of members, which must be held, within five weeks of statutory declaration a Special Resolution is passed by members agreeing to the company being placed into liquidation and for the appointment of a liquidator. If the shareholders do not want to wait for the full period of Notice they can convene at Short Notice and place the company into Liquidation as long as 90% or more are present to sign the resolutions being passed.
- Both the Resolutions, the Statutory Declaration of Solvency and Notice of the liquidator’s appointment are filed with the Registrar at Companies House.
- Additionally the Resolution and Notice of the liquidator’s appointment must be advertised in the London Gazette and two local newspapers.
- Assets are realised and once creditor’s claims have been approved, and after the liquidators fees and expenses have been deducted, the creditors are paid in order of priority together with statutory interest. Any surplus is then paid to the shareholders. At times assets can be distributed to shareholders in Specie. Especially when there is a split between the shareholders and they wish to go their own way. A Special Resolution must be passed to this effect.
- Accounts of the company need to be prepared up to the date of the Liquidation and submitted to the Revenue to establish any tax liabilities that may arise to that date. Additionally tax liabilities have to be paid by the Liquidator that may arise on any sale of assets or of trading profits if the company is being traded during his period of appointment
- Final meeting of members held to approve the closure
- Final return filed with registrar
- Company dissolved three months later.
When the company is in liquidation the liquidator has duties as he would in any other type of liquidation. He must gather in the assets and distribute them in accordance with the statutory order. He is still under a duty to investigate past transactions and to look at the directors’ behaviour prior to liquidation (except wrongful trading which only applies to insolvent companies). However, it is rare in practice that any detailed investigation is undertaken. Quite simply, the reason for this is that the whole nature of the members’ voluntary liquidation is that all the creditors will be paid in full plus Statutory Interest. If creditors are paid in full there is usually very little to complain about.
In order to carry out his duties, the liquidator is given extensive powers under Sch.4 to the IA 1986. These include power to:
- sell assets or distribute them In Specie to the shareholders;
- use the company bank account;
- appoint agents;
- litigate and defend litigation on the company’s behalf;
- carry on the company’s business; and
- do all of the things necessary to facilitate the winding up.
It is important that this process is finalised within 12 months although, if necessary, the Liquidation can continue further than 12 months. A members meeting must be convened on the anniversary of the liquidation.
If it appears to the liquidator during the course of the members’ voluntary liquidation that the company is insolvent, the liquidator must convert the liquidation to a creditor’s voluntary liquidation.