Understanding Members Voluntary Liquidations: An Exit Strategy
06 March 2024 by Jason Heidt
Often the term liquidation is associated with failure, however, that is not necessarily the case. In certain circumstances, liquidation can be a prudent and strategic move, particularly if the company is solvent, at the end of its useful life and its shareholders wish to wind down its affairs in an orderly manner. A members' voluntary liquidation is a key mechanism for such situations, providing a structured and cost-effective pathway for the dissolution of a company while maximising returns to its shareholders.
What is Members Voluntary Liquidation (MVL)?
Members’ voluntary liquidation (MVL) is a process by which a solvent company, whose members (shareholders) believe its purpose has been fulfilled or wish to exit the business, initiate the winding-up process in the best interests of the company and its stakeholders. Unlike compulsory liquidation, which occurs when a company is insolvent and unable to pay its debts, MVL is a voluntary decision made by the shareholders. A MVL only applies to solvent companies!
How Does Members Voluntary Liquidation Work?
Step 1: Board Resolution: The director/s of the company propose to wind up the company voluntarily and pass a resolution to convene an extraordinary general meeting (EGM) of the shareholders to consider and approve that decision.
Step 2: Shareholder Approval: At the EGM, shareholders vote on the resolution to wind up the company voluntarily. Typically, a special resolution is required to authorise the liquidation. The actual voting requirement will be determined by the company’s own constitution.
Step 3: Appointment of Liquidator: Following shareholder approval for liquidation, a liquidator is appointed to oversee the liquidation process. That is done by an ordinary resolution. The liquidator can be a licensed insolvency practitioner or an appropriately qualified person.
Step 4: Realisation of Assets: The liquidator takes control of the company's assets and, if required, realises them through sale. Sometimes the assets are not realised but are ultimately distributed to the shareholders “in specie” (i.e. in kind, such as real estate or shares).
Step 5: Settlement of Creditors: Prior to distributing the surplus assets to shareholders, the liquidator ensures that all outstanding debts and liabilities of the company, including taxes and employee claims, are settled.
Step 6: Distribution to Shareholders: Once all creditors have been paid in full, or adequate provision has been made for their claims, the remaining assets are distributed among the shareholders in accordance with their respective rights and interests. This need not be in cash. It could comprise the transfer of a share portfolio or land holdings to the members of the company.
Step 7: Final Steps: Following the distribution of assets, the company can be deregistered with ASIC.
Advantages of Members Voluntary Liquidation
Tax Efficiency: MVL can offer significant tax savings to shareholders, particularly in jurisdictions where capital gains tax rates are lower for liquidation distributions compared to dividends. For example, land prices have increased significantly over the last 35+ years. Assume a company sells real property which it acquired before September 1985 (when CGT became law in Australia) and realises a significant capital gain. If the company itself distributes that gain to its shareholders, they (the shareholders) will be taxed on that distribution. However, in the right circumstances, if the company is placed into MVL and the liquidator distributes that gain, the shareholders may receive their distribution free of tax.
Orderly Closure: By initiating an MVL, shareholders can wind up the affairs of the company in an orderly and controlled manner, minimising disruption and uncertainty.
Maximisation of Returns: MVL allows for the orderly realisation and distribution of the company's assets, potentially maximising returns to shareholders compared to alternative exit strategies. In addition to the tax advantages referred to above, certain States also provide stamp duty concessions for transfers of assets “in specie” by a liquidator to its shareholders, which concessions are not available to distributions by the company itself.
Legal Compliance: MVL ensures that the company complies with its legal obligations and fulfils its duties to creditors and other stakeholders in the winding-up process.
Considerations Before Initiating Members Voluntary Liquidation:
While an MVL offers benefits, it is crucial for shareholders to consider several factors before proceeding:
Legal and Regulatory Requirements: Shareholders must ensure that the company meets the statutory requirements for an MVL.
Financial Solvency: The company must be solvent, meaning its assets exceed its liabilities, and be able to pay its debts as and when they fall due.
Tax Implications: Shareholders should seek independent professional tax advice to understand the tax consequences of MVL, including potential implications for capital gains tax and other tax liabilities.
Creditor Approval: While an MVL is a shareholder-driven process, creditors have the right to challenge the liquidation if they believe it will prejudice their interests. The liquidator must ensure that creditors are treated fairly and that their claims are appropriately addressed and paid in full if valid.
Conclusion:
MVL serves as a strategic mechanism for solvent companies to wind up their affairs in an orderly manner and distribute surplus assets to shareholders, the process of which is usually overseen by a qualified liquidator, who is familiar with the intricacies and requirements of an MVL.
At BRI Ferrier, we have assisted many directors/shareholders pursue restructuring opportunities, including the use of the MVL mechanism. Our experience and expertise allows us to look at the situations dispassionately, with a focus on commercial outcomes for the parties involved within the legal framework. If your business is near the end of its useful life or you simply require an efficient and effective exit strategy which maximises your return from the company, please contact us at BRI Ferrier for an initial free and confidential consultation of your options.
Jason Heidt
Director
BRI Ferrier Adelaide