Restructuring & Insolvency
Members’ Voluntary Liquidation (MVL)
Corporate structures can be expensive to maintain especially when some parts are no longer required. A restructure through winding-up of excessive companies within the group can allow for a simplification of the corporate structure.
Some solvent companies are also wound up for certain taxation reasons.
Careful planning is required when dealing with taxation issues and transfers of assets to avoid unnecessary costs and taxes.
This article has been designed for solvent companies considering a members’ voluntary liquidation to simplify their group structures or gain tax advantage from formal winding up process.
What is a members’ voluntary liquidation?
A members’ voluntary liquidation (MVL) is a formal winding up process for a solvent company when its members no longer wish to retain the company’s structure, usually because the company has reached the end of its useful life and there are assets to be distributed amongst the shareholders, or to access tax benefits available only in a liquidation scenario.
Why choose members’ voluntary liquidation?
A company may be voluntarily deregistered without an MVL by way of an application to ASIC and payment of an application fee. The directors must confirm, however, all of the following:
- all members agree to the deregistration;
- the company is not carrying on a business;
- the company’s assets are less than $1,000;
- the company has paid all fees and penalties payable under the Act;
- the company has no outstanding liabilities; and
- the company is not party to any legal
The directors and members may determine the above criteria cannot be met, in which case an MVL should be used. The MVL sees that all outstanding creditors are paid in full, any surplus assets are distributed to member(s), and protects the members’ interests while the company structure is dismantled.
Another reason an MVL is commonly used is to enable the members to access certain tax benefits that would otherwise be unavailable. Where the company’s equity is made up of a mixture of retained earnings and capital profits, in certain circumstances, the Income Tax Assessment Act 1936 provides relief to members that are only available when the distributions are made by a liquidator.
An MVL is the only way to fully wind up the affairs of a solvent company. A voluntary deregistration does not prevent a party from applying to ASIC to re- register the company.
Starting a members voluntary liquidation
An MVL begins as follows:
- the director(s) resolve to call a meeting of members to wind up the company;
- director(s) complete a ‘declaration of solvency’ form that states the company is solvent and can pay all its debts within 12 months. The form is lodged with ASIC;
- after the declaration of solvency is lodged with ASIC, notice of the members’ meeting can be sent; and
- the member(s) resolve at the members’ meeting that the solvent company is to be wound up and nominate a
Determining if the company is solvent
Usually, a company is only considered solvent if it can, broadly speaking, pay all of its debts as and when they fall due. However, this strict definition does not apply to an MVL as the appointment typically lasts for at least 12 months. The director(s) therefore need to consider whether the company can meet all its debts within a smaller time frame, which is the upcoming 12 months. If so, they can determine the company is solvent.
If a liquidator subsequently forms the view that all creditors will not be paid in full within the 12-month period, the MVL must convert to a creditors’ voluntary liquidation.
Similarities between an MVL and creditors voluntary liquidation
The following areas are identical whether in an MVL or creditors voluntary liquidation:
- the powers a liquidator has;
- what happens to a company in liquidation;
- the company’s ability to continue trading;
- the directors’ duties to help the liquidator; and
- the order in which creditors are paid.
A difference between an MVL and creditors voluntary liquidation
A key difference between an MVL and a creditors voluntary liquidation is that the liquidator in an MVL does not have to be registered liquidator. The liquidator can even be a related party or officer of the company. However, to ensure all aspects of the law are followed, and particularly if a dispute among shareholders exists, it is recommended that a registered liquidator independent of the company and shareholders be appointed.
Investigations are undertaken in an MVL
Many of the investigations conducted in a creditors voluntary liquidation or court liquidation are not required under an MVL.
As the company is solvent and creditors should be paid in full, there is no need for any liquidator recovery actions to be initiated.
Unfair preferences and insolvent trading are recovery actions that require the company to be insolvent at the time of the transaction, or if there is a loss to creditors.
Liquidators may have to verify what assets are available to them.
Commonly, some assets are loans made to shareholders and are sometimes either in dispute or insufficiently recorded. In these cases, the liquidator may have to reconstruct the loan accounts to determine the amounts and extent of the debts.
A liquidator must ensure a proper distribution is made to members through the capital accounts of the company. This distribution requires some investigation into a company’s balance sheet, particularly capital reserve accounts and franking accounts. Generally, the company’s external accountant can provide a current and detailed balance sheet showing all equity accounts. The liquidator then pays the distribution to members in the most tax advantageous way.
How long does an MVL last?
An MVL lasts for as long as necessary. Selling assets and paying creditors usually happens within the first few months.
Completing the company’s financial statements and final tax returns could potentially delay the distribution to members, particularly if there is a dispute between members. Confirmation from the Australian Taxation Office (ATO) that all returns have been lodged and of the final amount owed to the ATO are essential before distributions are made.
Can a liquidator pay dividends?
Yes. The role of the liquidator is to sell the company’s assets and distribute them among:
- company creditors as a dividend; and then
- company shareholders as a
How does the MVL end?
The MVL process ends when all creditors’ claims are satisfied, all other issues are resolved, and any surplus is distributed to the members.
The liquidator lodges relevant forms with ASIC and the company is automatically deregistered by ASIC three months after the deregistration request is lodged by the liquidator.
If your business is experiencing financial difficulty, contact us to arrange a free, no-obligation discussion to give you clarity on your position and options available.