Members’ Voluntary Liquidation: The Complete Guide
A members’ voluntary liquidation (MVL) is the formal way to close a successful solvent company: one that can pay all of its debts in full. It is a court-free procedure conducted under the Insolvency Act 1986 by a licensed insolvency practitioner acting as liquidator, who realises the company’s assets, settles its liabilities with statutory interest, and returns the remaining capital to shareholders before the company is dissolved. Because the company is solvent, distributions to shareholders can often be treated as capital rather than income, which is usually the reason directors choose this route rather than simply drawing the money out as a dividend.
This guide explains when an MVL is appropriate, the declaration of solvency that underpins it, the procedure from start to dissolution, the general tax position, and how the route compares with striking a company off or with a creditors’ voluntary liquidation. It is general information, not advice for your specific company. Any decision to liquidate should be discussed with a licensed insolvency practitioner, and the tax treatment with a tax adviser.
What is a members’ voluntary liquidation?
A members’ voluntary liquidation is a solvent liquidation. The defining feature is solvency: the company can pay all of its creditors in full, together with statutory interest, within a stated period of up to twelve months. “Members” means shareholders, so an MVL is a liquidation driven by the owners of the company rather than by its creditors.
This is the single most important distinction to grasp. A company can be wound up voluntarily in one of two ways. If it is solvent and can pay everyone it owes, the route is a members’ voluntary liquidation. If it is insolvent and cannot pay its creditors in full, the route is a creditors’ voluntary liquidation. The two procedures share a name and some mechanics, but they have different purposes: an MVL closes a healthy company, while a CVL deals with a failed one.
An MVL is conducted under the Insolvency Act 1986 and must be led by a licensed insolvency practitioner who takes the appointment as liquidator. Although it sits within insolvency legislation, it is a solvent procedure: nobody outside the company can force it, and it ends with money going back to shareholders and dissolution.
When is a members’ voluntary liquidation the right route?
An MVL tends to suit a solvent company that has reached the end of its useful life and holds reserves or assets the shareholders want to extract tax efficiently. The catalyst is usually a decision by the directors that the company has no further purpose and that its assets should be realised and distributed to the shareholders.
Common situations include:
- Retirement or exit: an owner-manager is winding down and wants to close the company and take out the accumulated value.
- A company that has served its purpose: a single-project or holding company that no longer trades and is sitting on cash or property.
- Group restructuring and reconstruction: closing or reorganising entities within a group, sometimes as part of a wider tax-planning exercise. In certain reconstructions the business of the company being liquidated is transferred to another company in exchange for shares or other securities (see Section 110 below).
The common thread is that the company is solvent and the shareholders want a clean, final closure with the remaining value returned to them. Where a company is insolvent, an MVL is not available, and the appropriate route is a creditors’ voluntary liquidation or another insolvency procedure. Timing matters too: it is sensible to confirm the company’s solvency and take advice before the resolution is passed, rather than discovering problems once the liquidation is under way.
What is the declaration of solvency?
The declaration of solvency is the document that makes an MVL possible. It is a statutory declaration by the directors, or a majority of them, stating that they have made a full inquiry into the company’s affairs and have formed the opinion that the company will be able to pay its debts in full, together with statutory interest, within the specified period not exceeding twelve months from the start of the liquidation.
The declaration must:
- incorporate a statement of the company’s assets and liabilities as at the latest practicable date;
- be made before a solicitor or commissioner for oaths;
- be made not more than five weeks before the resolution to wind up; and
- be filed with the Registrar of Companies within fifteen days of the liquidation commencing.
A director must have reasonable grounds for the opinion they are signing. This is not a formality. Making a declaration of solvency without reasonable grounds, where the company then cannot pay its debts in full within the stated period, is a criminal offence. If you are not confident the company is genuinely solvent, the right step is to take advice before signing anything, because the position may call for a creditors’ voluntary liquidation instead.
How does the members’ voluntary liquidation process work?
The process moves through a defined sequence: declaration of solvency, shareholders’ resolution, appointment of the liquidator, settling liabilities, distribution to shareholders, and dissolution. In practice the proposed liquidator prepares the statutory paperwork and guides the directors and shareholders through each step.
1. Declaration of solvency
The directors swear the declaration of solvency described above, with the statement of assets and liabilities in a prescribed format attached, and it is filed with the Registrar of Companies. This statement is the financial backbone of the process: it sets out what the company owns and owes and supports the directors’ opinion that everyone can be paid.
2. Shareholders’ resolution to wind up
The shareholders pass a resolution to place the company into liquidation. A special resolution is usually required. It can be passed at a general meeting on twenty-one days’ notice, though shorter notice can be agreed by the right majority of members. A special resolution needs at least three quarters of the members entitled to vote, voting in person or by proxy, in favour. Private companies can often pass the resolution in writing without holding a meeting, where all eligible members sign. The resolution must be advertised in the Gazette within fourteen days and filed with the Registrar within fifteen days.
3. Appointment of the liquidator
At the same time, the shareholders pass a resolution appointing one or more licensed insolvency practitioners as liquidator. The liquidation commences when the winding-up resolution is passed. From that point the company exists only for the purpose of being wound up, although its corporate status and powers continue until it is dissolved. The liquidator may carry on the business briefly where that benefits the liquidation, for example to dispose of assets to better advantage or to sell the business as a going concern, although in most solvent liquidations the assets have already been realised and are held as cash at bank.
4. Settling liabilities
The liquidator takes control of the assets, agrees and pays the company’s liabilities in full, and provides for statutory interest. Because the company is solvent, creditors are paid in full rather than ranked and paid only in part. If unexpected creditors emerge and their claims cannot be met, the liquidation can no longer proceed as solvent and must be converted into a creditors’ voluntary liquidation. This is one reason the practitioner’s independent check on solvency matters.
5. Distribution to shareholders
Once liabilities are settled, the liquidator distributes the remaining funds and assets to the shareholders. Distributions do not have to be made in cash: a liquidator can distribute assets in specie, for example transferring a property to a shareholder rather than selling it and distributing the proceeds. Where an indemnity is in place, an initial distribution can sometimes be made very early in the process.
6. Final account and dissolution
When the liquidation is complete, the liquidator prepares a final account, reports to the shareholders, and files the necessary return with the Registrar of Companies. The company is then dissolved. A well-run MVL is designed to bring finality, so that the affairs of the company are properly closed off and shareholders can move on.
To keep the process efficient, it helps to have the company in as simple a form as possible before the liquidation starts: assets collected in and sold, staff matters dealt with, and known creditors paid. The less there is for the liquidator to unwind, the quicker and more straightforward the liquidation tends to be.
How are MVL distributions taxed?
This section is general information, not tax advice. The tax outcome of any MVL depends on the company’s circumstances and the position of each shareholder, and it should be confirmed with a tax adviser before you proceed.
In broad terms, the appeal of an MVL is that funds returned to shareholders in a liquidation are generally treated as capital rather than income. For many shareholders, a capital distribution is taxed more favourably than the equivalent amount taken as a dividend, which is the usual reason an MVL is chosen rather than simply drawing the reserves out of the company. Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, may be available to reduce the rate of capital gains tax for shareholders who meet the qualifying conditions, but eligibility, rates and thresholds change and are specific to each person’s circumstances.
Because the rules and rates in this area change and depend heavily on individual facts, the figures matter less than the principle: an MVL can open up capital treatment that may not be available by other means. Whether it does in your case, and what it is worth, is a question for a tax adviser.
MVL or striking off: which suits a solvent company?
Striking off, also called dissolution, is the other common way to close a solvent company, and it is simpler and cheaper than an MVL because it does not involve a liquidator. The trade-off is in scale and tax treatment. As a broad rule of thumb, where the amount to be distributed to shareholders on closure is modest, an application to strike the company off the register may be the more proportionate route. Where larger sums are involved, an MVL is often used so that the distribution can be treated as capital. The threshold commonly cited for capital treatment on a strike-off is £25,000, but this is a tax point that should be confirmed with an adviser for your own situation.
Striking off also offers less certainty than a liquidation. A dissolved company can in some circumstances be restored to the register, and a strike-off does not provide the same formal, practitioner-led closure of the company’s affairs that a liquidation does. For a company with meaningful reserves, assets to distribute or the possibility of late claims, or any real complexity, an MVL usually gives the cleaner outcome.
How does an MVL compare with a CVL?
An MVL and a creditors’ voluntary liquidation are mirror images. Both are voluntary liquidations begun by the company rather than by the court, and both end with the company being wound up and dissolved by a licensed insolvency practitioner. The difference is solvency, and it changes the whole purpose.
In an MVL the company is solvent, creditors are paid in full with interest, and the surplus goes back to shareholders. In a CVL the company is insolvent, the assets are realised to pay creditors as far as they will stretch, and shareholders generally receive nothing. The two processes also differ in who controls the outcome: an MVL is driven by the members, whereas in a CVL the creditors have the decisive say in the liquidator’s appointment. If a company that began an MVL turns out to be insolvent, the procedure is converted into a CVL.
For directors weighing up closure, the starting question is therefore simple: can the company pay everyone it owes, in full, within twelve months? If yes, an MVL is on the table. If no, it is not, and the conversation is about insolvency options instead.
Frequently asked questions
Why must an MVL be led by a licensed insolvency practitioner?
Because the law requires it: only a licensed insolvency practitioner can act as liquidator. There is also a protective reason. In agreeing to take the appointment, the practitioner is independently satisfying themselves that a solvent liquidation is appropriate. If insolvency concerns are lurking, or unexpected creditors later appear whose claims cannot be met, the MVL has to be converted into a creditors’ voluntary liquidation, and the practitioner’s involvement is what manages that risk properly.
What are the tax benefits of an MVL?
The main attraction is that funds distributed to shareholders in a liquidation are generally treated as capital rather than income, which for many shareholders is taxed more favourably than taking the same money as a dividend. Business Asset Disposal Relief may further reduce the rate for those who qualify. This is general information only: the actual benefit depends on your circumstances and the current tax rules, so confirm the position with a tax adviser before relying on it.
How quickly can shareholders be paid?
It depends on the company’s affairs and how cleanly they can be settled. Where the company is in a simple state and an indemnity can be provided, an initial distribution to shareholders can sometimes be made very early, occasionally within days of the liquidation starting. More complex cases, with assets still to realise or creditor claims still to agree, take longer.
How much does an MVL cost?
The cost of an MVL reflects the complexity of the case rather than a fixed price: the assets to be realised, the number of creditor claims to agree and pay, and any group or reconstruction elements all affect the work involved. A straightforward solvent company, with assets already turned to cash and creditors already settled, sits at the simpler end. The way to control cost is to get the company into as simple a form as possible before the liquidation begins. We are happy to give a clear fee estimate once we understand the specific case.
Can assets be distributed without being sold first?
Yes. A distribution does not have to be made in cash. A liquidator can distribute assets in specie, meaning an asset such as a property is transferred directly to a shareholder rather than being sold so the proceeds can be paid out. This can be useful where shareholders want to keep a particular asset, although the tax treatment of an in specie distribution should be checked with an adviser.
What is a Section 110 reconstruction?
A Section 110 is a type of MVL used to reconstruct a solvent business tax-efficiently under section 110 of the Insolvency Act 1986. In outline, one or more new companies are formed, the assets of the liquidating company are transferred to them, and the shares in the new companies are distributed to the original shareholders. These arrangements are typically led by lawyers and tax advisers and can be involved, so they need specialist input from the outset.
Speak to a licensed insolvency practitioner
Every company’s position is different, and the right closure route depends on the detail. McTear Williams & Wood acts through licensed insolvency practitioners regulated by the ICAEW, and we have handled many members’ voluntary liquidations for retiring owners, dormant companies and group reorganisations. If you are considering closing a solvent company, book free initial advice or call 0800 331 7417 to talk it through. You can also read more about our solvent liquidations service, and for the wider picture on company closure and insolvency, The Director’s Guide to Company Insolvency.