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When it comes to closing a solvent company in the United Kingdom, business owners have two primary options: Members Voluntary Liquidation (MVL) and striking off. Each method has its advantages and disadvantages, making it crucial for company directors to carefully consider which approach is the most suitable for their specific circumstances. In this article, we will compare MVL and striking off in terms of key aspects such as timing, costs, capital return, restoration possibilities, prosecution risks, and tax implications.
Members Voluntary Liquidation (MVL) – A Secure Exit Strategy
MVL, also known as Voluntary Striking Off, is a method of dissolving a company that provides a more certain outcome compared to striking off, especially concerning creditors’ claims being settled and the lawful return of share capital. Additionally, it is an economically efficient approach to remove a company from the Companies House register and bring it to an end.
Timing: Speed and Solvency
MVL can be initiated quickly, and funds can be withdrawn, subject to contingencies, immediately after the appointment of a liquidator. To start the process, directors must swear a declaration of solvency, and members need to pass a special resolution. Notably, there is no need to wait for a 3-month cessation of trade period, which is required in striking off.
Costs: Liquidation Fees vs. Registrar Fee
The costs associated with MVL primarily include liquidators’ fees and disbursements (e.g., advertising and bonding). Planning and involving existing accountants can help resolve taxation and other financial positions before proceeding with MVL. In some cases, an indemnity may be required from the company’s members. Liquidators often operate on a fixed-fee basis.
In contrast, striking off incurs a modest £10 fee to the registrar of companies. However, there are likely to be additional professional fees involved in preparing the final accounts and tax returns for dissolution and the period leading up to cessation of trade.
Capital Return: Legal Return of Share Capital
MVL enables the legal return of share capital to the company’s members. It also allows for distributions in specie, where assets like property can be returned to members. This is a significant advantage over striking off, where any remaining assets become bona vacantia (ownerless property) and vest in the Crown, with no lawful return of capital.
Restoration: Possibilities and Hurdles
In the event of MVL’s completion and the company’s dissolution, creditors can apply to court to restore the company to the register. However, the merits of restoration must be questioned as the liquidator would have advertised and distributed all assets, making it a complex and challenging process.
In striking off, creditors have the option to apply to the court to restore the company to the register within six years of its dissolution. Once restored, former directors are considered to be in office again, and any assets previously held by the Crown become available to creditors.
Prosecution: Risks and Consequences
Directors opting for MVL must be cautious about deliberately misleading anyone with the declaration of solvency, as it may lead to criminal proceedings. This aspect emphasises the need for honesty and transparency throughout the MVL process.
Similarly, striking off can result in legal consequences if false information is provided or any breaches occur in the application for dissolution. In fact, recent cases have seen directors sentenced to prison for striking off offences.
Tax Implications: Eligibility and Limits
One significant benefit of MVL is that it can mean distributions are eligible for Business Asset Disposal Relief at a rate of 10%, which currently has a lifetime limit of £1,000,000. However, there are additional eligibility requirements that must be met to claim this relief.
Conversely, striking off only qualifies for Business Asset Disposal Relief if the total distribution to all shareholders is less than £25,000. Distributions exceeding this amount constitute a distribution of income, and HMRC will require income tax to be paid on the surplus over £25,000.
Let’s sum up
Choosing between Members Voluntary Liquidation (MVL) and striking off for company dissolution is a decision that should not be taken lightly. Both methods have distinct advantages and disadvantages, and the choice should be made based on the specific circumstances and goals of the company. Whether it’s the certainty of MVL, the cost-efficiency of striking off, or the implications for tax and restoration, understanding the differences is essential for making an informed decision when it’s time to close the doors of your business.
If you would like to discuss your circumstances with a member of our team to see which approach might be best for you, please complete the contact form below and we’ll be in touch with you soon.