MVLs—a ticking time bomb?

MVLs—a ticking time bomb?

Are members’ voluntary liquidations (MVLs) a ticking time bomb? Helen Kavanagh and Charles Draper, members of the restructuring & insolvency practice of Squire Patton Boggs, consider whether the rush to take advantage of the lower level of tax available under the previous tax regime has left directors and insolvency practitioners (IPs) with a ticking time bomb.

Background

Due to the introduction of new tax legislation on 6 April 2016, distributions made to shareholders of companies undergoing MVL are now treated as income (rather than capital) and are taxed accordingly. The result is that the tax rate on MVL proceeds has shot up to a staggering 28%, as detailed. For distributions to avoid being taxed at this rate, they must have been made before the 6 April 2016.

MVLs—a recap

To put a company into MVL, uniquely among corporate formal insolvency processes, directors swear a statutory declaration of solvency—a statement that the company will be able to pay all its debts in full with interest in a period not exceeding 12 months. From the outset, an IP appointed as liquidator is reliant upon this declaration and the accuracy of the company’s accounts to list all the assets and liabilities of the company so as to ensure that all the creditors of the company will be fully paid from the proceeds of the liquidation—the primary aim of an MVL. Once creditors have been paid in full, the remaining balance is distributed among the shareholders and the liquidator will dissolve the company.

Where may problems arise?

An MVL is a straightforward procedure with a shell company as part of a corporate re-structuring or a cashing-out procedure where there are assets and few liabilities to muddy the waters, but is a much different proposition with a trading company. A company engaging in business will have a more complex set of accounts, with new debts being created and old debts being paid off. As a result, it is far harder to keep track of every creditor and poor book-keeping or administrative errors could lead to a creditor being overlooked when the company’s liabilities are drawn-up. This difficulty is compounded further if the directors of the company are careless or negligent in their running of the company, or even, in the worst case scenario for a liquidator, fraudulently conceal creditors to ensure a return for the members from the assets of the co

Subscription Form

Related Articles:
Latest Articles:

Already a subscriber? Login
RELX (UK) Limited, trading as LexisNexis, and our LexisNexis Legal & Professional group companies will contact you to confirm your email address. You can manage your communication preferences via our Preference Centre. You can learn more about how we handle your personal data and your rights by reviewing our  Privacy Policy.

Access this article and thousands of others like it free by subscribing to our blog.

Read full article

Already a subscriber? Login