Extracting the benefit from a project after all the hard work

28 / 06 / 2017

There are usually two ways to wind down a solvent company which has served its purpose. What are the pros and cons of each course of action and the factors to consider along the way?

You might have bought the land, built the block and sold the assets in the company. You might have sold a long-term asset in an SPV. You might just want to simplify your corporate structure to reduce holding and reporting costs or for wider tax reasons across a group.

What do you do to close the company and return value to shareholders? When winding down a solvent company, directors generally have two options – undertake a members’ voluntary liquidation (MVL) or a voluntary strike off. It is important to ensure you adopt the most appropriate process.

A MVL is a statutory process to wind up the affairs of a solvent company and a licensed insolvency practitioner must be appointed to carry out the process. The insolvency practitioner advertises for and settles any liabilities prior to distributing assets to shareholders and dissolving the company.

In comparison, a voluntary strike off is a process whereby directors can apply for a company to be struck off the register and dissolved. It is a process intended to be used to dissolve dormant companies with no assets or liabilities. Nevertheless, it is a generally accepted practice for smaller private companies to reduce share capital and distribute assets to shareholders in preparation for voluntary strike-off.

The key differences between an MVL and a voluntary strike-off are set out below.

Characteristic

Strike Off

MVL

Used when Dormant company with no assets or liabilities Solvent company with assets and/ or liabilities
Criteria Not traded or disposed of property or changed name for 3 months Able to discharge creditors within 12 months
Requirements Directors file at Companies House, with copies to creditors Directors must sign declaration of solvency
Assurances No: directors assume responsibility for strike-off process Yes: liquidator follows statutory process
Directors’ personal risk For breach of strike-off process or unlawful distributions False declaration of solvency
Other May be combined with capital reduction Liquidator may disclaim onerous assets and contracts

The closure of a long-established business. Due to these differences, examples of when an MVL is likely to be more appropriate than the voluntary strike-off process include:

  • Following a business and asset sale with sale proceeds to be distributed to shareholders.
  • The closure of a solvent company with contingent or uncertain liabilities.
  • As part of the retirement planning of shareholders, where property and other assets are to be distributed to the personal estates of shareholders.
  • As part of the simplification of a group of companies that includes dormant or uneconomic subsidiaries.

It is important that directors make an informed decision when considering winding down and dissolving a solvent company including the issue of tax (including tax for the shareholders). There is a potential tax benefit for shareholders if they qualify for entrepreneur’s relief, where the return of the company’s assets is not treated as income, but a return of capital. Entrepreneur’s relief allows for 10% tax to be payable on the return.

By choosing the most appropriate option directors can maximise the return to shareholders and avoid the risks of personal liability.  FRP Advisory is a specialist business advisory firm, we can assist you to make key strategic decisions more effectively and help your business to respond and adapt.

This article was written by a guest author; Phil Armstrong, a Partner at FRP Advisory LLP