Extracting the benefit from a project after all the hard work
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 shown in the table.
Due to these differences, examples of when an MVL is likely to be more appropriate than the voluntary strike-off process include: • The closure of a long-established business.
• 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.
Phil Armstrong, Partner FRP Advisory LLP e: Phil.Ar
t: +44 (0)20 3005 4269
Directors' personal risk
Other Characteristic Used when Criteria Strike Off
Dormant company with no assets or liabilities
Not traded or disposed of property or changed name for 3 months
Directors file at Companies House, with copies to creditors
No: directors assume responsibility for strike-off process
For breach of strike- off process or unlawful distributions
May be combined with capital reduction
Solvent company with assets and/or liabilities
Able to discharge creditors within 12 months
Directors must sign declaration of solvency
Yes: liquidator follows statutory process
False declaration of solvency
Liquidator may disclaim onerous assets and contracts
| Page 2
| Page 3
| Page 4
| Page 5
| Page 6
| Page 7
| Page 8
| Page 9
| Page 10
| Page 11
| Page 12