Smorgasbord/(smor/gas/bord) noun 1. a range of delicacies served as a buffet; 2. a wide range of something, a variety.

So, the company has served its purpose as a commercial vehicle and it is time to give it a decent burial. It may be that it has been owner-managed and has provided the family with a good source of income for many years, but now it’s time to wrap things up and draw out the value in the form of cash. Alternatively, the company may have been part of a group but is no longer needed; or maybe the company was created for a specific purpose and that purpose is no longer relevant. In fact, there are a number of reasons why business owners may wish to bring about the end of a healthy, solvent company.

The type of company that finds itself in this position is probably limitless ranging from any type of trading business to an SPV which is now merely a cash shell. Yet the common factor is that the shareholders will generally wish to convert their interest in the company into cash and to do so in the most tax-efficient way possible. This is especially the case for individual shareholders who, from a tax perspective, may be faced with the choice of treating the distribution as either income or capital, which can have significant cost implications for them – especially in the case of higher rate tax payers.

In reality, the choices for a company in this situation are probably limited: do the directors strike the company off the Company Register, or do they initiate a formal liquidation process in the form of a Members’ Voluntary Liquidation (‘MVL’)? A number of recent changes to the availability of tax and other concessions on distributions of capital outside of liquidation mean that realistically, MVL will often be the only route to follow for a solvent company with anything other than the very lowest levels of cash reserves.

Yet the choice of MVL as a means of converting share capital to cash should be a positive rather than a negative one because as far as shareholders are concerned, MVL offers them a smorgasbord of benefits …

What then is an MVL? It is a formal process that begins with a directors’ declaration that they consider the company will be able to pay its debts in full plus interest within a period not exceeding twelve months of its winding up; shortly thereafter, the shareholders pass a special resolution to wind the company up voluntarily and appoint a liquidator (who must be a licensed insolvency practitioner or ‘IP’) and with this the company is “in liquidation”.

The effect of the liquidator’s appointment is that the directors’ powers cease and in turn it becomes the liquidator’s job to collect in and realise the company’s assets and distribute the proceeds to any remaining creditors. Creditors paid within the liquidation are entitled to interest at the official rate (currently 8%). Upon payment of the costs of the liquidation, plus claims and interest, the liquidator must distribute the surplus monies to the shareholders in accordance with their rights. When the liquidator has completed his task, the company is dissolved.

Sounds simple? Well, yes, it can be. Provided the company’s asset position is relatively straightforward and its tax matters are not complex, the whole process can probably be concluded within (on average) 9 months. In practice, provided the members provide the liquidator with a safety net in the form of an indemnity, the liquidator may be in a position to release a substantial proportion of the cash to shareholders very soon into the process.

Yet, MVL is such a sophisticated process that it can even be used to enable shareholders to extract the value from a company which faces some surprisingly complicated issues. It offers shareholders a range of benefits that may not be immediately obvious, but they are no less delectable.

In the event that the company’s assets take a form other than cash (such as property, vehicles, and even directors’ loan accounts) and the shareholders want to receive the asset in its existing, rather than a cash form, this does not present the liquidator with a problem; provided the shareholders pass a resolution empowering the liquidator to distribute “in specie”, shareholders can receive an asset in its existing form. Proper valuation of the asset and careful consideration of a number of other tax issues are critical in this situation.

The IP will wish to work closely with the company’s tax advisors to seek the optimum tax benefits for stakeholders from the MVL process. Even the simple matter of timing can have significant tax consequences for a solvent company wishing to use MVL, especially around the end of a tax year. In fact, given the relationship between MVL and the system of taxation, the reference to MVL as an “insolvency process” is perhaps a misleading one: MVL is actually an incredibly effective tax-planning tool.

One of the greatest benefits of MVL is the treatment of distributions made within the formal process as capital rather than income, which means that individual shareholders are able to take advantage of the various benefits available under the Capital Gains Tax regime. Use of MVL to convert capital to cash can provide higher rate tax payers in particular with a huge financial advantage.

Whilst the ability to further reduce tax in some cases has been withdrawn by HMRC recently (as highlighted in our December technical update Members Voluntary Liquidation – Proposed Changes to Company Distributions) there are still many cases where this benefit will be available although clearly we would always recommend that clients seek advice from their professional advisors.

One of the lesser-known things about MVL is the sophistication of the rules contained within the liquidation process. The rules contain a mechanism that allows a company to “flush out” any residual claims of which the directors have been unaware and enable the company to deal with them with finality. Provided the liquidator follows a prescribed procedure for dealing with creditor claims – including advertising a final date for proving the claim – a creditor’s failure to come forward by the relevant date means that the liquidator is able to leave such a claim out of account before distributing remaining funds and moving to dissolution. Such claims may include a potential right of action against the company which has not been notified to the directors and may also include any debts subject to personal guarantees.

This facility does not provide the directors with an excuse to exclude or omit any known claim from the declaration of solvency (anyone who does so potentially exposes themselves to significant personal risk) nor would it be wise for a liquidator to fail to deal with any creditor claim of which he is aware, but having a mechanism that provides creditors with a “last chance” to make a claim against the company before it disappears from existence does provide both the company and its directors with a level of comfort that is simply not available to a company with the voluntary strike off route.

Additionally, the MVL process contains a mechanism that allows the liquidator to quantify, compromise and ultimately pay future and contingent claims against the company. This facet of the MVL process is supported by a strong legal precedent which highlighted the liquidator’s capacity to deal with the known contingent claim and bring the liquidation to an early conclusion.

The key element of the MVL process is that the company must be able to meet all creditor claims, plus interest, within the period stated in the directors’ declaration. Subject to this, relying on the professional skills of an IP to navigate the MVL process and to utilise the various options available to him really can enable shareholders to enjoy the smorgasbord of benefits that MVL is able to offer them.

MY-MVL: an even simpler solution

In order to further streamline the MVL process and allow professional advisors to take more control, Leonard Curtis has developed a piece of specialist software which allows advisors to manage the MVL process for simple cash shell liquidations.

This streamlined process is available now and offers simple MVLs for a fixed fee of £2,000 + VAT and is inclusive of disbursements.

Click here to find out more and arrange a demonstration.

If you have any questions or require any further information then don’t hesitate to call your local Leonard Curtis contact.

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