Solvent Liquidation

Solvent companies may also be subject to liquidation proceedings. The process is known as a members voluntary liquidation "MVL" and must be handled by a licensed insolvency practitioner.

MVL is a means of bringing a company to a formal end and distributing its surplus funds or assets to the shareholders. This is undertaken either through payment of a cash dividend (treated as a capital receipt in the hands of the recipient) or a distribution "in specie" i.e. where assets are passed to the shareholders rather than cash.

MVL's are available when the directors are in a position to make a formal declaration that the company is solvent and can pay all of its liabilities in full within 12 months. This process ends the life of a company, leaving no outstanding matters and provides a potentially tax efficient exit route for shareholders.

We have experience in handling MVL's, working with the company's existing tax advisers and accountant or using our own tax specialists and in house accounting team, in order to effect the most appropriate strategy. For example, many advisers suggest that the use of extra statutory concession C.16 is a cheaper and more viable alternative to an MVL. This is not always the case and, as is normally the situation in tax sensitive issues, proper planning and thought is required such that the most suitable route is followed.

For information we note below certain policies, procedures and ideas inherent in the Meston Reid & Co approach to an MVL.

• MVL: an introduction
• Preparatory work
• Taxation

• Commencement of an MVL

• Appointment of liquidator

 

MVL: an introduction

The majority of MVL's arise as a result of a reconstruction, a tidying up operation with or without tax implications within a group of companies, the closing down of a family business, or the termination of a private company that was established for tax purposes. Shareholders often imagine that an MVL is simply a case of passing a resolution and completing the winding up overnight. This misconception applies particularly with dormant companies within a group, where shareholders do not always appreciate the importance of ensuring that a company is in a position to be wound up. It may take some time before a company is organised suitably so that the best tax and commercial advantages can be gained from an MVL.

Meston Reid & Co personnel dealing with an MVL will interview a company's representative(s): likely to be the accountant or solicitor initially, and obtain all necessary information concerning the company's affairs, its current position and the reasons for its liquidation. It is possible that, as a result of such discussions, a procedure other than liquidation is recommended.

The directors/shareholders will be given an outline of the procedures required before liquidation and the basis on which Meston Reid & Co charge fees for providing these services. There may be a fee for preparing the company up to the date when the resolutions to wind up and appoint a liquidator are passed, and another fee for dealing with the liquidation for tax deductibility purposes prior to the MVL commencing.

When an MVL is in contemplation, appointment as liquidator will not be accepted without careful consideration given to the implications of acceptance and in any case where there is any doubt concerning a possible conflict of interest, it may be appropriate to decline the appointment. In this regard, due consideration will always be given to the insolvency ethics guidelines issued by the Institute of Chartered Accountants of Scotland.

 

  Return to top

Preparatory Work

Work under this heading includes the following:

• search at companies house for company statutory information.
• obtain a copy of the memorandum and articles of association.
• obtain a copy of the latest signed accounts, and management accounts
• ascertain the name and address of the company's auditors.
• ascertain the name and address of the company's solicitors.
• ascertain the name and the branch of the bank(s) the company uses currently, and has used in the recent past.

Arrange a meeting with representatives of the company, or its parent company, who have background knowledge of the company's affairs, and discuss with them among other things:

• the reasons for the proposed liquidation.
• any problems that may have arisen as a result of the investigations mentioned above.
• any ongoing problems they know about.
• arrangements for statutory meetings.
• cessation of the directors' powers when a liquidator is appointed.

The possibility exists that the company may have assets or liabilities other than those disclosed in the balance sheet. If there are any hidden or potential assets e.g. intellectual property, patents, or trade marks registered in the name of the company, whether beneficially owned or not, the company's representatives need to be told that those assets must be conveyed or assigned before the company is fully wound up. If not title may pass to the crown. Similarly, any outstanding contracts or obligations e.g. pension funds, hire arrangements and service contracts, will be settled, preferably before the liquidation commences, but certainly before the winding up is completed.

Dormant subsidiary companies can be vulnerable in this respect particularly where, in the process of an earlier reorganisation, the company's business (including its assets and liabilities) has been transferred to another group company, and that company has incorporated those assets and liabilities into its balance sheet either without having obtained title or without having assumed legal responsibility for its contracts or obligations with the consent of the creditors concerned.

 

  Return to top

Taxation

 

As noted above, this is an area of fundamental importance. The principal aspects include:

 

Fact finding

• establish contact either with the person at the company or with the accountant who deals with the tax affairs and obtain.
• obtain copies of the latest accounts and tax computation.
• obtain the address of the inspector of taxes concerned and the company reference number.

 

Pre-liquidation distributions

Ensure that due consideration has been given to the taxation implications both from the company's and the shareholders' points of view. It is not possible to anticipate all the issues that may be encountered, but two that occur regularly are:

• where a company's balance sheet shows capital or revenue reserves, consideration should be given to paying a pre-liquidation distribution of all, or part, of them in order to minimise the effect of capital gains tax when the liquidator distributes the surplus assets.

• in a close company, consideration should be given to the pre-liquidation distribution of all distributable income, in order to avoid a shortfall assessment. All distributions a liquidator makes to shareholders are deemed to be returns of surplus assets.

 

General tax matters

Other points to be considered are:

• when a company resolves to wind up, an accounting period ends for corporation tax purposes at the date of the resolution and a new one begins.
  
• the date on which an accounting period ends may have a significant effect on the ability to set losses against profits or chargeable gains, whether in the same company or by way of group relief. Whenever possible, the resolution to wind up should be timed to achieve the best results. Also, where a group of companies is being re-constructed and partially sold, the existence of an agreement to put this into effect may upset any group relief arrangements already in force.
  
• the Inland Revenue will expect to receive accounts and the computations up to the date on which the resolution to wind up is passed.
  
• the liquidation accounting period will be for each 12 months from the date on which the resolution is passed.
  
• income received in the liquidation is subject to corporation tax without relief for expenses.
  
• where income e.g. bank interest is accruing during the period before liquidation, arrangements should be made for it to be credited to the company immediately before the liquidation commences, and for it to be included in the accounts as "received" rather than "receivable". Similarly, where interest payable is accruing it should, if possible, be paid before liquidation. This will enable it to be set against any trading income during the period.
  
• waiver of inter-company trading debts is likely to result in the amount released being treated as a trading receipt in the hands of the debtor. Before a debt can be waived, a company must have power to waive debts in its articles of association.
  
• when a subsidiary that is to be liquidated has trading losses, such losses should normally be surrendered by way of group relief to the maximum extent possible prior to liquidation.
  
• if a company has chargeable assets and the disposal of those assets might give rise to chargeable gains, the assets should, if possible, be transferred to a group company that has unused capital losses.
  
• if a company is resident overseas for taxation purposes the appointment of a UK resident as liquidator may cause the tax residency of the company to revert to the UK . In such circumstances, consideration should be given to the use of an overseas Nexia office for the liquidation process.

 

For any liquidation which is part of a larger reconstruction of a group of companies, or where the method of passing surplus assets to shareholders is to be done in a way that plans to avoid adverse tax consequences, proper tax clearances should be obtained at all stages of the process.

 

  Return to top

Commencement of an MVL

 

Board meeting

It is usual for a board meeting to be held to transact only the business necessary to initiate an MVL. This business consists of:

 

• preparing a declaration of solvency.
• passing a resolution to take steps to place the company into liquidation.
• instructing the company secretary to summon an extraordinary meeting of members and determining the text of the resolutions to be proposed at that meeting.

 

Care should be taken to ensure that this meeting is properly convened, and that resolutions are passed and minuted in the prescribed manner: in particular with regard to notice, quorum, voting, the number of directors in office, and any other procedures prescribed by the company’s memorandum and articles of association. Minutes of the meeting should be prepared, and signed by the chairman. Whenever possible, all the directors should be encouraged to attend the meeting, and a majority must attend in order that the declaration of solvency may be made.

 

If there is any difficulty in obtaining the presence of a majority of the directors e.g. if some are resident overseas, the problem may be overcome by arranging for sufficient of those who are unable to attend to resign before the declaration is sworn.

 

Where all the directors are overseas it is possible for the directors’ meeting to be held outside the UK provided that the same procedures are observed and that arrangements are made to have the documents filed with the registrar of companies within the specified time limits.

 

The declaration of solvency requires to be sworn before a solicitor/notary public.

 

Notice of meeting of members

Except where short notice is agreed by the members, the company must give 21 days’ notice, or any greater period that the articles of association require, of a meeting at which a special resolution is proposed.

The period of notice must be reckoned, and the notice served in the manner prescribed in the articles of association. The notice period normally excludes the day on which notice is served and the day of the meeting, and notice is deemed to be served 24 hours after it has been posted by first class post.

Any shorter notice must be agreed by a majority in number of the members who hold shares that give them the right to attend and vote, and who, together, hold at least 95% of such shares. Written agreement to short notice should be obtained before the extraordinary general meeting and minuted.

 

Special circumstances

 

Where it is impracticable, for whatever good reason, to hold a members’ meeting in the prescribed manner, any director or member who is entitled to vote may apply under section 371 of the companies act 1985 for a meeting to be held under the direction of the court.

Alternatively, a resolution or an agreement to wind up signed by all the shareholders is likely to be effective, even if a meeting has not taken place.

Form of notice to members

 

The notice must specify:

 

• the date, time and location of the meeting.
• the type of meeting e.g. extraordinary.
• the resolution to wind up.
• the fact that the resolution is proposed as a special resolution.
• the text of any other special or extraordinary resolutions to be proposed, and the fact that they are to be proposed as such.
• a statement that the member is entitled to appoint a proxy to attend and vote in his place, and that the proxy need not be a member.

 

It is advisable for the liquidator’s appointment to be effected at the same time as the resolution to wind up is passed. Therefore, it is usual for both the resolution to wind up and the resolution for the appointment of a liquidator to be embodied in one special resolution.

The appointment of a liquidator, as opposed to the resolution to wind up, may be made by either ordinary or extraordinary resolution. With an ordinary resolution it is not necessary to specify the resolution in the notice. An extraordinary resolution does not require to be wholly specific. Thus, where the choice of liquidator cannot be determined until immediately prior to the EGM, the appointment can be made by ordinary resolution.

 

Service of notices

 

Notice of the EGM must be sent to the registered/last known address of all members who are entitled to attend and vote.

 

The notice must comply with any special provisions in the articles of association as to the serving of notice e.g. on joint shareholders, legal representatives and trustees, members resident outside the UK.

 

Meeting of members

 

The meeting is subject to the normal provisions for general meetings, and the chairman needs to be aware of any provisions that may affect the conduct of the meeting.

The main provisions likely to be relevant are as follows:

Voting

Ordinary resolutions require a simple majority of the votes cast, either in person or by proxy, by those entitled to vote. Special and extraordinary resolutions require the votes of at least three quarters of those members who, being entitled to do so, vote either in person or by proxy (if proxy votes are allowed).

Quorum

The quorum is two members who are present, subject to any other provision in the company’s articles of association.

Proxies

Proxy forms must be submitted in the manner specified by the articles of association.

A proxy may vote only on a poll, unless other provisions is made in the articles of association.

When the company issues an invitation to each member to appoint a nominated person or persons to act as proxy, that invitation must be sent to all members who are entitled to receive notice of the meeting.

 

Resolutions to be passed

A special resolution must be passed to wind up and to appoint a named liquidator. Alternatively, the appointment of a liquidator may be made separately by ordinary resolution.

The liquidator’s remuneration is fixed by the company in general meeting and it is usual to include this as part of the special resolution.

It is advisable to include a resolution to deal with the disposal of the company’s books and records. This will be an extraordinary resolution.

It is advisable, especially where a company has only one beneficial shareholder, to include a resolution authorising the liquidator to distribute assets in specie. The company’s articles of association will determine what sort of resolution is required: usually an extraordinary resolution. If the articles of association contain no such provision, it is suggested that a distribution in specie is sanctioned by a special resolution. This may be done at the same meeting.

Adjournment

If the original meeting is adjourned, and the resolution to wind up is passed at the adjourned meeting, the resolution will be deemed to have been passed at the time when it was passed i.e. not at the time of the original meeting.

Formal business

The following matters are normally dealt with at the time of the EGM:

 

• minutes of the meeting are prepared, and are signed by the chairman.
• the necessary forms for filing the special resolutions and The Edinburgh Gazette/local newspaper are completed, and signed by the chairman of the meeting, and attested as necessary.

The liquidator will uplift these documents in order to ensure that they are properly filed and dealt with in the statutory period.

 

  Return to top

Appointment of liquidator

The liquidator must give a written statement to the chairman of the EGM that he is suitably qualified under the Insolvency Act 1986 and consents to act. The chairman will certify the appointment on the appropriate form.

Within 14 days of his appointment, the liquidator must publish in The Edinburgh Gazette and deliver to the registrar of companies for registration, a notice, in statutory form, of his appointment.

As soon as possible after his appointment the liquidator must obtain a specific bond of insurance in order to cover the value of the assets subject to his appointment. The cost of such bond will be determined by the insurance company and from and outlay of the liquidation process.

 Return to Top