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.
we note below certain policies, procedures and ideas inherent
in the Meston Reid & Co approach to an MVL.
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
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
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.
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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
- 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
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.
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.
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As noted above,
this is an area of fundamental importance. The principal
- establish contact either with the person at the company
or with the accountant who deals with the tax affairs
- obtain copies of the latest accounts and tax computation.
- obtain the address of the inspector of taxes concerned
and the company reference number.
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.
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
- 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
- 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
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
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of an MVL
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
- 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
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
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.
of solvency requires to be sworn before a solicitor/notary
of meeting of members
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
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
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
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.
of notice to members
The notice must
- 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
- the text of any other special or extraordinary resolutions
to be proposed, and the fact that they are to be proposed
- 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
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.
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 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:
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).
The quorum is two members who are present, subject to any
other provision in the company’s articles of association.
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.
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.
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.
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
will uplift these documents in order to ensure that they
are properly filed and dealt with in the statutory period.
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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.
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