What is a Members Voluntary Winding Up?
A members voluntary winding up, or MVL – so called because the process is controlled by the company’s members (shareholders) is a mechanism for closing down the affairs of a solvent company which no longer serves any useful purpose, but where there are assets and liabilities in the balance sheet that need to be dealt with correctly.
Why undertake an MVL? Is there an alternative?
There are several possible reasons to wrap up a company’s affairs through an MVL. Some of the more common are:
- Legal minimisation of tax upon distribution of company assets to shareholders;
- Placing a cap on unknown potential or contingent liabilities such as warranty claims or other legal risks;
- Where the skills needed to wind up a complex solvent entity balance sheet may not be held by the directors or their tax agent;
- Where disagreement between shareholders demands the intervention of an independent, skilled professional;
- To eliminate annual fees for company registration, taxation, accounting, consent for the registered office, record keeping and storage.
An MVL is not the only way to close down the affairs of a solvent company. In simple situations where there may be limited or no assets, no tax implications and all debts have been paid, the company can simply be deregistered by lodging a form with ASIC and paying a small deregistration fee. However, strict rules apply to a voluntary deregistration, which if breached, can result in significant penalties to the directors and shareholders. For example, a company with liabilities cannot be voluntarily deregistered.
What are the tax benefits?
MVLs are heavily tax driven. Legal minimisation of tax is one of the main reasons shareholders may opt to put a solvent company that has outlived its usefulness through MVL.
While IRT Advisory does not provide taxation services and is not qualified to provide specific taxation advice, we have assembled the following general guidance to assist you evaluate whether an MVL may be suitable for your company’s circumstances before specific taxation advice is sought. We recommend that specific advice on all taxation matters affecting your company should always be sought from a qualified and registered tax agent before proceeding with an MVL.
Broadly speaking, taxation benefits that are available to a company whilst it is operating can retain their character and flow through to shareholders as part of the MVL process.
Small business CGT concessions
If the company is eligible for capital gains tax (CGT) concessions upon disposal of an asset (for example, if the company sells its business prior to or during the MVL), those concessions will retain their character upon distribution to shareholders by the Liquidator. If the distribution occurred outside of an MVL, the rate of taxation to the shareholder may be significantly higher.
Although pre-CGT assets (assets acquired before 20 September 1985) are no longer commonly held given the passage of time since the introduction of the CGT laws, particularly in the case of mature age shareholders moving toward retirement, there is a greater chance of pre-CGT assets still being held in the company’s balance sheet. Typically such assets would be real property which may have increased in value by orders of magnitude since purchase. The ability to realise such assets on a tax free basis is therefore very valuable. This can be achieved by realisation of the asset in the context of an MVL, with CGT free dividends flowing to shareholders.
In more complex situations, a company may have a mix of pre- and post-CGT assets and reserves in its balance sheet. The Liquidator in an MVL will identify and separate those amounts to ensure correct information is available for preparation of the company’s final tax return and also individual members’ personal returns.
How are contingent liabilities dealt with?
A contingent liability is one which does not currently exist but may arise in the future, contingent upon a specific event occurring.
Examples include long tail warranty, personal injury and public liability claims against the company, which in some cases take many years to surface. It is not reasonable to expect shareholders of a defunct company to keep it alive and insured against such risks on the off-chance that a claim may be made.
In an MVL, the Liquidator will examine the potential for such claims to arise and advertise for proofs of debt from possible unknown claimants. If no claims are made during the MVL, the winding up would be finalised without regard to any such unknown future claims (which may never arise).
While a court can order the reinstatement of a company that has been liquidated through an MVL, this is likely to be a difficult and expensive process for the claimant, with little likelihood of recovery if the company’s assets have all been distributed.
Why use a registered liquidator?
The law does not mandate that the liquidator of an MVL must be a registered liquidator (registered under section 20-30 of the Insolvency Practice Schedule). In theory, any person can wind up a solvent company.
But … there are many duties and responsibilities associated with winding up a solvent company. Considerable skill and knowledge is required to fulfil those duties. A registered liquidator is fully equipped with the skills, experience, resources and technical infrastructure to perform an MVL efficiently and effectively, with far less risk of things going wrong.
Company shareholders can take comfort in the knowledge that registered liquidators are required to maintain professional indemnity insurance to protect all stakeholders in the event that something untoward should take place.
A registered liquidator has the independence, impartiality and people skills to carefully manage and diffuse conflict between shareholders, should it arise.
Registered liquidators have wide networks of contacts and referrers in a range of professions. Where assistance is required in matters outside the appointed liquidator’s area of expertise, such as taxation, asset valuation, legal etc, a registered liquidator can readily seek such additional expertise as may be needed in the MVL from those networks.
Given the above, we do not recommend that persons other than a registered liquidator accept MVL appointments.
Costs of maintaining a company
Annual fees are incurred to maintain the registration of a company, including ASIC annual review fees, accounting and taxation fees, fees for consent to use of a registered office and document storage costs. Unless a company is trading or has some other useful purpose, incurring these costs needlessly is not sensible. An MVL can put an end to these ongoing costs, once the company is deregistered.
What is the process for an MVL?
In summary, the following must occur to commence the MVL:
- The directors resolve that the company is solvent and will be able to pay all its debts within 12 months.
- A declaration to that effect, listing all the company’s assets and liabilities is signed and lodged with ASIC.
- The proposed liquidator consents to act.
- Next, the directors convene a meeting of shareholders to consider passing a special resolution to voluntarily wind up the company.
- At that meeting, the solvency declaration is tabled and members vote on the resolution proposed by the directors. Once the resolution is passed, the company is in liquidation. Members also approve the liquidator’s remuneration.
- The liquidator takes control of the company in all respects and proceeds with the required tasks.
Although uncommon, a liquidator under an MVL may take control of a company with a trading business. The liquidator is permitted to continue trading for a limited period if doing so is in the best interests of creditors and members of the company, by for example, realising the business as a going concern to maximise its value.
If after appointment the liquidator discovers that there will not be sufficient assets to pay all creditors in full within 12 months, the MVL must be converted into a CVL, or creditors voluntary (insolvent) liquidation.
Investigations required to be undertaken in an insolvent liquidation do not occur in an MVL, given that all creditors will be paid in full. Because no creditor will sustain a loss, the law provides that enquiry into the conduct of the directors prior to appointment is unnecessary.
The liquidator proceeds to realise the company’s assets, pay its liabilities, attend to all taxation requirements and distribute the surplus to shareholders. Where appropriate, assets may be distributed in-specie (that is, the asset itself, rather than the proceeds of sale).
A distribution statement is provided by the liquidator to each shareholder listing all amounts and components of their distribution. This assists shareholders complete their personal tax returns for the year of distribution.
The cash component of dividends is paid and title to assets distributed in-specie is transferred.
At the completion of all tasks, the liquidator calls a final meeting of shareholders prior to finalising the appointment and arranging deregistration of the company. The meeting is required for statutory purposes but there are no consequences if a quorum is not achieved.