Introduction
A Members’ Voluntary Liquidation (MVL) is a solvent liquidation that begins on the passing by the shareholders of a special resolution for the company to be wound up voluntarily. There is no involvement by the court. The procedure is often used for group restructurings and there is no stigma attached to the process as all of the debts of the company are paid in full.
An MVL is a procedure that involves the agreement by the liquidator (who is a qualified insolvency practitioner) of the present value of creditors’ claims. The company’s assets are then realised and distributed among the company’s creditors. Any surplus, after payment in full of creditors’ claims, is paid to the company’s shareholders. The company is then dissolved and removed from the register of companies.
Critical to an MVL is the Statutory Declaration, which must be sworn by a majority of the directors that the company is able to pay its debts within 12 months. The Statutory Declaration must be in Statutory Form 4.70 | there are more than two at a board meeting | be made not more than five weeks before the date of the winding up resolution and be filed not later than 15 days after the date of such resolution.
Attached to the Statutory Declaration is a statement of assets and liabilities that must include all contingent liabilities but cannot include contingent assets.
Should the company become insolvent post the members’ resolution to wind up, it is presumed that the Statutory Declaration was not made on reasonable grounds, unless the directors can prove to the contrary.
If they are unable to do so they will be liable to a fine or imprisonment or both. Therefore, it is essential that directors fully investigate the creditor position. The directors’ due diligence may reveal liabilities that the company is unable to meet out of its assets or that the company may be exposed to contingent or prospective liabilities. In these cases, it is common for the company’s parent to provide an indemnity, or make a capital contribution, to cover these liabilities; state that the directors making it have conducted a full enquiry into the company’s affairs and formed the view that if the company becomes insolvent, the liquidation opinion that it will be able to pay its debts, together becomes a creditors’ voluntary liquidation with interest, in full within a stated period not exceeding 12 months
The members control the conduct of the winding up. The members appoint the liquidators and the liquidators lay the annual and final accounts before the members only. It is normal practice for two liquidators to be appointed so one is always available to sign documents. The liquidators will have joint and several powers.
On the appointment of the liquidators, all the powers of the directors cease except so far as the company in general meeting or the liquidators, sanction their continuance. Outstanding litigation against the company is not automatically stayed, but the liquidators are entitled to apply to court for a stay.
Procedure
- Members resolve to provide any necessary indemnities.
- Directors of the company meet to approve declaration of solvency.
- Declaration of solvency made by majority of | all the directors.
- Members pass a special resolution for the company to be wound up and appoint the liquidators (either at a general meeting of the company or by written member’s resolution).
- Copy of the special resolution is sent to Companies House within 15 days and is advertised in the London Gazette within 14 days.
- Liquidators contact actual and contingent creditors of which they are aware and invite them to prove for their debts.
- Liquidators accept or reject proofs of debts in whole or in part. Creditors whose proofs have been wholly or partially rejected are entitled to apply to court within 21 days for an order varying this decision.
An MVL can be preplanned in consultation with an insolvency practitioner. This allows assets to be transferred on a ‘first day’ basis. An indemnity will be required by the liquidators in those circumstances, because distributing the assets on the first day of the liquidation is in breach of the liquidators’ duties | failing to investigate creditor claims before making a distribution is acting negligently. The liquidators will normally insist that the amount of the indemnity is equal to the value of the assets as at the date of liquidation.
Distribution
Under section 107 Insolvency Act 1968, a liquidator must distribute the company’s property between the members in accordance with their rights and interests in the company. The company’s articles may make provisions that alter these rights, for example by allowing for a distribution in specie.
If the company’s articles do not permit a distribution in specie, the company must authorise the liquidators to declare a distribution in specie by passing a special resolution either in a meeting or by writing. The resolution shall set out the property to be distributed and the recipients.
Costs/expenses of liquidation
All expenses properly incurred in the winding up, including remuneration of the liquidators, are payable out of the company’s assets in priority to all other claims.
It is difficult to estimate the liquidators’ costs until the scope of the work to be undertaken is fully understood. However, an estimate can be given by the proposed liquidators once the scope of the assignment is known.
Advantages
An MVL can be relatively quick and inexpensive. Once the declaration of solvency and the attached statement of assets and liabilities has been completed, finalising the indemnities and the other MVL documentation can be achieved quite quickly. The company can be placed into an MVL on the same day the meetings are held. However, the directors must have carried out a full inquiry into the company’s affairs before making the Declaration of Solvency. This will impact on the timing of the liquidation.
Again, with a little preplanning (and the appropriate indemnities in place) the liquidators may be able to distribute the assets to the members on the same day as they are appointed.
The liquidators are not required to file a report on the directors’ conduct.
The company is automatically removed from the register of companies three months after the liquidation is completed and, whilst an interested party may apply to restore the company to the register, this is only for a period of two years (up to 30 September 2008) and six years (post 1 October 2008).
Disadvantages
A director who makes a declaration of solvency without reasonable grounds is liable to fine/imprisonment or both.
Liquidation may trigger the automatic winding up of any company pension scheme, which may be expensive and problematic. Equally, an MVL may trigger termination provisions in the company’s contracts.
The liquidators have the right to disclaim any onerous property, being any unprofitable contract or property that is unsaleable or not readily saleable or may give rise to an obligation to pay money or perform an onerous act.
Liquidators
The liquidators may require an indemnity (often from the parent company or another group company). In addition to the matters raised above, this is because, on their appointment, the liquidators will take control of the company’s assets and affairs. If the liquidators are required to make a first day distribution they will require an indemnity.
For support in preplanning an MVL contact us on 0207 183 7829