MVLs: the liquidation process that benefits solvent companies

The word “liquidation” is usually associated with negative activities, such as failed companies. But there’s one type of liquidation that targets solvent companies wanting to wind up – a Members’ Voluntary Liquidation.

A Members’ Voluntary Liquidation (MVL) is designed for companies that have achieved their original purpose and are no longer required. The directors and shareholders may want to unlock tax benefits or convert any remaining assets to cash for distribution, which is where an MVL can help.

What is an MVL?

An MVL is specifically designed for solvent companies to wind up their affairs once they’re no longer needed. They’re a very tax-effective way for shareholders to access any value left in the company before it’s formally deregistered. MVLs are initiated by the directors of the company, who convene a members’ meeting where the shareholders pass a special resolution to have the company wound up.

Why not choose to voluntarily deregister?

While a company can decide to be deregistered, this process involves meeting all of the following conditions:

• all the members of the company must agree to the deregistration
• the company must not be carrying on any business
• the company’s assets are worth less than $1000
• the company has paid all fees and penalties payable under the Corporations Act
• the company has no outstanding liabilities
• the company is not a party to any legal proceedings

If any of these conditions aren’t met, then the company cannot be voluntarily deregistered. Generally, only a company that hasn’t been trading, or has been dormant for some time, will be able to satisfy the above criteria. It’s also worth noting that while MVLs tend to cost more than applying for deregistration, the potential tax savings of an MVL usually outweigh this downside.

When is an MVL the best option?

If a company has been trading until recently, going down the MVL path is generally more suitable, and the process will identify and deal with any residual liabilities of the company.

Other situations where an MVL is a more appropriate option than a voluntary deregistration, include:

• where assurance is required that the company cannot be reinstated
• where companies trade in a high-risk industry
• when franking credits or tax-free dividends would be lost through voluntary deregistration

Key benefits of an MVL

• An MVL ensures that a thorough and proper due process is undertaken so any creditors are identified.
• There is a higher level of assurance that the company will not be reinstated – this is important for companies exposed to higher levels of risk.
• There are often more favourable taxation outcomes for the shareholders. In particular, shareholders may be able to benefit from CGT concessions. For example, if shares were acquired prior to 20 September 1985, there would be no tax payable for that part of the liquidator’s distribution (pre-CGT). Also, if the shares were acquired after 20 September 1985, then shareholders may be able to access the general 50% CGT discount or the small business CGT concessions.
• There are other practical matters, such as forgoing document retention costs by obtaining consent from ASIC for the early destruction of company’s records.

How does an MVL work?

The company will typically conduct a thorough due diligence process to ensure any matters that should be addressed prior to placing the company into liquidation are identified and dealt with. These could include any taxation issues or organising corporate records and accounts.

Once any pre-liquidation issues have been resolved and the company has been placed into liquidation, the liquidator will:

• receive confirmation in relation to the liabilities of the company;
• correspond with all relevant taxation authorities to ensure that outstanding returns and statements are lodged, and to receive final tax clearances;
• distribute the remaining assets of the company (if applicable) to shareholders; and
• make arrangements for the final administrative matters to be attended to so that the company is deregistered with ASIC.

Don’t forget …

Before appointing a liquidator for an MVL, don’t forget to sort out all relevant paperwork. This involves ensuring the company’s last tax return is lodged, as any delay can affect the distribution of dividends to shareholders. Also, find the origin of the make-up of any reserve or capital gain balances on a company’s balance sheet. Getting the paperwork in order first will assist in avoiding any delays down the track.

Should you want more information about the benefits of MVLs, please don’t hesitate to contact me.

Peter Moore
Partner
Jirsch Sutherland