Licensed Insolvency Practitioner in Northampton and the West Midlands

• Where the shareholders want to 'ring-fence' historic profits from potential subsequent attack from, say, HM Revenue & Customs, who may want to revisit the company or indeed could change the tax laws some time down the line.  Many advisers recommend closing down small to medium sized businesses from time to time to protect historic profits from other potential claimants too, or to take advantage of occasional tax breaks;
  
• Where the company has come to the natural end of its life, such as following the owner's retirement, following a sale of the business and assets, after the closure of the business or the end of the project for which it was set up.  Examples of the latter include companies  set up to carry out a particular building development, a specific joint venture arrangement, the setting up of trade in the UK by a foreign owned group;
  
• Where there are 'difficult creditors' which the directors would like to deal with conclusively.  The liquidator in a MVL has the power to bring property leases to an end, without having to obtain the agreement of the landlord by using the disclaimer provisions of the Insolvency Act, breaking any impasse reached previously between the directors and the landlord.  
  
• As a cost saving exercise, where a group eliminates defunct subsidiaries;
  
• Many listed groups and larger private groups use the MVL route to close down subsidiaries no longer required as a matter of policy.  This is because of the added security it gives in the medium term;  
  
• As part of an overall group or company restructuring, whether or not as part of a turnaround;
  
• Where there are commercial or tax advantages in splitting the company, business or group up, using the Section 110  reconstruction  procedures.  These are discuused further on a separate page, click through on the link.

What are the alternative procedures for achieving the same result?

It depends what you want to achieve, how much you are willing to spend, what your attitude to risk is, and the size of the advantage you are looking to achieve, but the following alternatives may be available:

• The use of Extra Statutory Concession C16 ('ESC C16'), followed by the striking off of the company under s 652 Companies Act 1985, to return surplus cash and/or assets to the shareholders. 
  
  ESC C16 enables a company to return cash or assets to shareholders, with HM Revenue's consent, as a 'capital' rather than 'revenue' distribution for tax purposes, with the associated tax advantages that brings to the shareholders.  The ESC is purely a tax concession, the company then has to go through an additional process to prepare it for being struck off.  The route commonly chosen for this is the general Companies Act provision to strike a company off on the basis that it is no longer trading. 
  
  Although this option is cheap, under the current law any creditor or other 'interested party' who should later come to light can restore the company to the register at any time in the 20 years after strike off (compare this with just 2 years if the MVL route is taken), possibly resulting in the shareholders being asked to repay earlier distributions and the directors criticised for having paid out illegal distributions.  Nevertheless, this option is probably the most appropriate for the simplest of cases, where there is no likelihood of such a creditor or interested party appearing.
  
  Note that the time period for an interested party to restore a company to the register is planned to be harmonised, whatever the route to strike off is taken (whether the MVL route or equivalent of S652), with effect from 1 October 2009 at 6 years.  This means that now is a good time to put a company into MVL;
  
  
• Paying dividends, bonuses under Schedule E, or making pension contributions out of revenue reserve.  The company's and your individual tax considerations are key here;
  
  
• Reducing the company's share capital.  This is a costly exercise, probably only best done for larger companies;     
  
    

The best solution for you will depend on the company's and the shareholders' particular circumstances.  You should take advice from both a tax expert and licensed insolvency practitioner in order to ensure that you take the right route.

What are the advantages of the MVL route?

• The period during which an interested party can restore the company to the register is 2 years - compare this with the twenty years if the Section 652 route is taken;
  
• There are significant tax advantages for shareholders - distributions out of a MVL are treated as a capital distribution, taxable under Capital Gains Tax rules, rather than an income distribution attracting higher income tax rates and NIC;
  
•  The Liquidator can use his powers under the Insolvency Act to deal with 'difficult creditors' such as landlords - the Liquidator can force a disclaimer of the lease on the landlord and then agree the landlord's claim as a creditor from a position of strength; 
  
• Cost - it costs less than the capital reduction route.   
   
   

What are the disadvantages of the MVL route?

• You have to satisfy yourself that the company is solvent and can properly go into MVL.  If you swear a declaration of solvency without having done all the work you need to in order to properly swear it, you will have committed a criminal offence.  The onus is on you to prove that you did all you should have done to properly swear the declaration, the law assumes that you did not; 
  
• If the company has not paid its creditors in full, with interest, within a maximum of 12 months, it will go into Creditors Voluntary Liquidation ('CVL'), leading to further costs, increased time commitment and a report being submitted to the DTI on your conduct as a director;
  
• Cost - it costs more than the ESC C16 route.  A typical 'standalone' MVL costs £5k to £10k - but bulk (10 or more) MVLs of listed or unlisted group companies carried out en masse where there is an existing relationship between the Liquidator and the group can be done for as little as £1.5k each if virtually all the work is done by the parent and the liquidations are merely an administrative process;
  
• As it is a formal insolvency process, various statutory procedures must be followed.  The IP will walk you through them and is responsible for following most of them.  An MVL is like any old relationship, it does take some time and effort to close it down this way!
   

How does it work, in overview?

1. The directors meet up with an IP and tax expert to explore whether MVL is the best route;
   
2. The directors pay all the company's debts they can and carry out a thorough investigation to identify any unascertained or contingent debts, such as potential landlord claims under historic leases, old customer warranty claims, etc.  They record that they have done this;
   
3. A directors' meeting is held to formally instruct the IP; 
   
4. The declaration of solvency is prepared by the IP based on information from the directors, and sworn by a majority of the directors in front of a solicitor;
   
5. A meeting of shareholders is called to put the company into liquidation and appoint the Liquidator.  At that meeting the basis of the Liquidator's remuneration is agreed;
   
6. The Liquidator advertises for any fresh creditor claims, advises Companies House of the liquidation and writes to any residual creditors;
   
7. Any cash in the company's account is transferred into an account opended up by the Liquidator; 
   
8. The shareholders return their share certificates to the Liquidator for cancellation.  The shareholders give the Liquidator an indemnity for any lost share certificates and agreeing to return such cash and assets to him should any distributions prove illegal while the Liquidator is in office - such as where late and substantial creditor claims are received;
    
9. The Liquidator obtains any clearances that he needs, such as from HMRC, and realises any residual assets.  The Liquidator sends 21 day notices to prove to any potential creditors who have not done so; parties claiming to be creditors who are, in his view, not owed anything; notices to difficult creditors whose claims he does not accept.  In the latter case, he advises the creditor that he considers his claim to be £x, and gives him 21 days to go to court to prove otherwise, failing which the creditor is bound.  This is a useful tool for dealing with difficult people such as landlords and former customers;
    
10.   Once the Liquidator has all the paperwork he needs from the shareholders and he is satisfied there are no more creditors, he can distribute any cash by way of a capital distribution, and any assets (such as properties) 'in specie;
     
11.   The Liquidator then sends a final report to shareholders and calls a final meeting of shareholders to close the liquidation and obtain his release.  After that he advises Companies House of the closure of the liquidation, and three months later the company is struck off.

This page was last modified on Wednesday, September 03, 2008