What Happens When a Members Voluntary Liquidation becomes an Insolvent Liquidation?
The Members Voluntary Liquidation is one of the core tools of insolvency practitioners. As a solvent liquidation, where by definition, the company wishing to liquidate has sufficient assets to cover all of its debts within a 12 month period, it is sometimes tempting to consider the process to be reasonably straightforward. After all, there are no creditors demanding the money that is owed to them. However, this is certainly not the case when an MVL becomes an Insolvent Liquidation.
The reality is that MVLs can be lengthy and complex and things could go awry if the Liquidator’s attention to detail is not 100%, not least because of:
- the changing policies, rules and regulations that HMRC introduces on a fairly regular basis – sometimes very quietly. A recent change concerns the new statutory interest rate of 8% per annum on corporation tax payments.
- differences of opinion amongst the liquidating shareholders that need to be addressed and settled.
This article looks at a few of the areas that need to be considered for a smooth running and timely Members Voluntary Liquidation, but looks first at what happens when a Solvent Liquidation becomes an Insolvent Liquidation.
Click on this link to see some testimonials for successful Members Voluntary Liquidations that we have completed. Since we started as Insolvency Practitioners in 1997, we have acted as Liquidators on close to 500 MVLs.
What Happens if a Solvent Liquidation Becomes an Insolvent One?
This can and does happen. Should a solvent liquidation become insolvent, this is usually because the liabilities were higher (this would include interest that might not have been accounted for) or the assets were lower than expected in value, or both. Under these circumstances, the liquidator must convert the solvent liquidation into an insolvent liquidation as soon as possible (after the liquidator forms the view that the company cannot pay its debts in full, including statutory interest).
If the MVL is converted into an insolvent liquidation, there could be some serious consequences:
- the liquidator may resign,
- costs will increase,
- the director’s actions will be investigated; and
- a return to the insolvency service will be made on the director’s conduct. This could lead to a director disqualification investigation if the director has not fulfilled his/her duties.
Under these circumstances, it follows that the director will also have incorrectly sworn a statutory declaration of solvency, which could have further serious consequences, as we point out below.
Statutory Interest and HMRC – a Change in Policy When Dealing With Corporation Tax Payments
Up until recently, it has been HMRC’s policy to use the normal due date for the payment of corporation tax, even if the MVL commences before the due date. If the tax is paid after that date, then HMRC only sought interest of 3% from the due date.
Now, a Liquidator is obliged to add statutory interest (at 8%) onto liabilities paid during the Liquidation. HMRC have started to be very strict with regard to receiving their statutory interest entitlement and have started refusing to provide the necessary tax clearance until it has been settled. In order to avoid paying unnecessary interest it is advisable to pay HMRC liabilities before the Liquidation, even if it is an estimated balance.
The same principle applies to VAT and PAYE as well as corporation tax.
Our view is that this change is evidence that HMRC are beginning to tighten up on the tax benefits available to shareholders in Members Voluntary Liquidations and the tax extracted from companies entering the process. It is, therefore, wise to plan for these eventualities when considering an MVL.
Some Key Considerations When Running a Members Voluntary Liquidation
Some of the following are statutory requirements, whilst others involve the Liquidator having the skill and experience to know what to look out for and how things work ‘in the field’, all of which matter in terms of accuracy, compliance and speed.
- The Declaration of Solvency This is a statutory requirement and must be sworn before a solicitor or a commissioner for oaths and must be sworn before the winding up resolution is passed. If not, then the Liquidation will be classed as a Creditors Voluntary Liquidation.
- Written resolutions can be used for widespread shareholders or where there are issues between individual shareholders. There often are issues between different shareholders, who might want tdifferent things out of the liquidation
- HMRC clearance is required. Before a MVL can be closed it is necessary to obtain full clearance from HMRC. HMRC require accounts and a Corporation Tax return up to date of Liquidation.
- What about PAYE? Any PAYE scheme should be closed down and the monthly return filed with HMRC.
- What about VAT? A VAT return up to the date of Liquidation or de-registration will be required. This is regardless of whether the company is actively trading or dormant.
- A full review of the Company records should be undertaken. This is to ensure that there are no forgotten creditors or long term warranties & guarantees.
- Pension Schemes and Liabilities. If the Company has historically operated a pension scheme for employees, care must be taken to ensure that all benefits have been transferred out and no liabilities remain.
- Workplace Pensions and Automatic Enrolment. If the Company has had employees recently, the Pension Regulator might raise issues regarding the automatic enrolment of employees into a workplace pension scheme.
- What about the Company’s Bank Account? When notified about the Liquidation, Banks transfer control of the account to their Liquidation departments. This can delay the closure of the account and the passing of the final balance over to the Liquidator. In many MVLs it is this final balance that the liquidators – and the shareholders – are waiting for. The shareholders need to be kept aware of all possible delays.
Contact us if your are considering a Members Voluntary Liquidation
[cta-general]
If you are considering a Members Voluntary Liquidation – maybe for tax reasons, for a reorganisation or perhaps simply to realise you and your shareholders interest in a business – and need some help and advice, call us on 0208 088 0633 or contact us for a FREE initial chat. We have the quality team and the experience to deliver the best possible result for you.
