SOLVENT RESTRUCTURING AND LIQUIDATION
There are two main areas we see when shareholders and directors consider the voluntary winding up of a solvent company.
Solvent winding up of a company
For shareholders, this relates to extracting wealth in the most tax efficient manner. For directors, as well as looking to maximise returns to shareholders, the issue is to reduce filing and audit costs in relation to dormant and / or non-trading companies within a group. It may also relate to the need to demerge different parts of a business to resolve disputes between shareholders, facilitate a business sale or ring-fence less profitable or high risk activities.
Most groups of companies have at least some dormant subsidiaries whose useful life is over and which add no value to the business. In addition, it is estimated that each dormant subsidiary costs somewhere in the region of £5,000 per annum in terms of compliance costs and wasted management time.
When applied to single companies, a members’ voluntary liquidation (“MVL”) brings about its tidy and complete end. When applied in group reorganisations or simplifications, MVLs can result in more streamlined and transparent group structures, addressing any regulators’ concerns and avoiding wasted management time on unproductive compliance activities.
An MVL, in combination with a ‘section 110 procedure’, can enable the separation of property assets and trade. Assets can be transferred to new companies without cash transactions, and with no gains arising. The transfers can facilitate a sale of a trading business and the risk of trading businesses having a negative impact on property assets can be managed.
While there are alternative mechanisms that can be used in some situations, they have their weaknesses. For example, simply striking a company off the Register of Companies limits the capital distribution that can benefit from CGT rates, and leaves directors exposed to risks from unidentified future claims. Furthermore, striking off is not available if there has been any trade (or any material transactions) in the previous three months. We can also advise whether a MVL is appropriate or whether the company may be struck off without the need for liquidation.
Extraction of wealth for shareholders
There have been important changes which will have significant consequences for directors and shareholders when it comes to winding up the affairs of a solvent company and the appropriate method by which to achieve such a winding up.
From 1 March 2012, distributions resulting from a company being struck of the Register of Companies and exceeding £25,000 are subject to income tax rather than CGT.
An MVL however facilitates the extraction of shareholder wealth in a tax efficient way. A distribution made by a liquidator to shareholders is a capital distribution. Thus, shareholders will be liable to CGT on the sums that they receive. CGT rates are lower than income tax rates, as low as 10% if the shareholder qualifies for Entrepreneurs’ Relief. In addition, each individual shareholder is entitled to an annual exemption from CGT (currently £11,000).
Other benefits and advantages of an MVL
There are further advantages of an MVL over an informal winding up of a company, which may give directors and shareholders comfort in the process of winding up a company’s affairs, including:
- Reduced risk for directors
- Formal cessation of directors’ powers
- Formal process and risk managed by the liquidator
- Legal process to return capital to shareholders
- All net assets and reserves can be returned to shareholders
- Provides a formal mechanism to identify and bring finality to creditors’ claims
- Can facilitate a distribution in specie of property and other assets
- Provide formal elimination of a company
- Closing off filing obligations
- Demerger of business/assets to facilitate reorganisation through Section 110 schemes
- An MVL provides a vehicle for resolving any disputes
We have an active solvent reconstructions and liquidations team and can assist in streamlining group structures and returning value to shareholders.