Member’s Voluntary Liquidation (MVL) Member’s Voluntary Liquidation (MVL) is a strategic process utilised to conclude the affairs of a solvent company. This procedure is initiated by the company’s directors and shareholders, and it offers distinct tax advantages when distributing retained earnings to the shareholders.
Understanding Member’s Voluntary Liquidation
Member’s Voluntary Liquidation (MVL) serves as a structured mechanism to bring closure to the operations of a solvent company. It is crucially initiated by the company’s directors and shareholders. The principal advantage of an MVL is the potential for tax savings, particularly in the distribution of past profits to shareholders.
Various types of liquidation may be considered depending on the company’s financial situation and specific circumstances. Generally:
- For solvent companies seeking a voluntary conclusion of their affairs, Member’s Voluntary Liquidation (MVL) is the suitable choice.
- In cases of insolvency, a Creditor’s Voluntary Liquidation (CVL) is commonly employed.
- For recovering debts from debtor companies, a Statutory Demand leading to Court Liquidation is an option.
- Complex internal disputes may necessitate a Provisional Liquidator appointed by the court to safeguard assets and assess the situation.
- Member’s Voluntary Liquidation vs. Company Deregistration
Company Deregistration is often perceived as a simpler, faster, and more cost-effective alternative to Member’s Voluntary Liquidation. However, specific conditions must be met for deregistration:
- Unanimous agreement from all company members.
- The company ceases business operations.
- Company assets are valued at less than $1000.
- All fees and penalties under the Corporations Act are settled.
- No outstanding liabilities exist.
- The company is not involved in legal proceedings.
In some cases, opting for Member’s Voluntary Liquidation over deregistration is advisable. Considerations include:
- Ensuring the company cannot be reinstated.
- Operating in a high-risk industry with potential liabilities.
- Preserving franking credits or tax-free dividends.
- Dealing with ongoing company issues.
- Determining the Need for Member’s Voluntary Liquidation
Member’s Voluntary Liquidation represents the most prudent and measured course of action when contemplating corporate dissolution. Its inherent distinction lies in its suitability for solvent entities, making it an optimal choice for companies with a strong financial footing. A critical prerequisite for pursuing Member’s Voluntary Liquidation is the company’s ability to settle all outstanding obligations, including tax liabilities, within a reasonable timeframe of 12 months.
This financial stability ensures that creditors’ rights are respected and that all parties involved can exit the process with their interests duly safeguarded. Should the company find itself unable to meet this essential criterion, it becomes imperative to explore alternative avenues for liquidation, with Creditor’s Voluntary Liquidation emerging as a prevailing choice. In such instances, the focus shifts from voluntary winding-up to addressing the financial responsibilities owed to creditors, necessitating a different approach to the liquidation process.
The Process of Member’s Voluntary Liquidation
Below is a comprehensive outline of the Member’s Voluntary Liquidation process:
- Step One – Corporate Simplification Review: Evaluate necessary actions to prepare the company or group for MVL.
- Step Two – Meeting of Directors: Pass a resolution for signing the Declaration of Solvency and convene a general meeting of members to consider resolutions for winding up, asset distribution, and liquidator appointment.
- Step Three – Lodgement of Declaration of Solvency: File the Declaration of Solvency before sending out the notice of the members’ meeting.
- Step Four – Notice to Members: Typically, members must receive 21 days’ notice for the meeting. Consent to Short Notice may be used with 95% shareholder agreement.
- Step Five – Meeting of Members: Pass resolutions for company winding up, liquidator appointment, determining the liquidator’s remuneration, and specifying when company records can be destroyed.
- Step Six – Lodgement of Resolutions: Lodge resolutions within seven days and advertise the appointment on the Insolvency Notices website.
- Step Seven – Other Notifications: Notify relevant parties, such as the Australian Tax Office.
- Step Eight – Practical Matters: The liquidator addresses various tasks, including finalising tax returns, asset realisation, creditor payments, and surplus asset distribution to shareholders.
- Step Nine – Annual Meeting: If the liquidation extends beyond 12 months, hold an Annual Meeting of Members.
- Step Ten – Finalisation: When the company’s affairs are fully concluded, call a Final Meeting of Members and file the necessary returns and accounts.
- Step Eleven – Deregistration: The company is automatically deregistered three months after the final meeting.
Tax Benefits – Small Business CGT Concessions
Member’s Voluntary Liquidation can maximise Capital Gains Tax (CGT) concessions. Benefits may apply to proceeds from the sale of pre-CGT assets or with Small Business CGT concessions. Four types of CGT Small Business Concessions exist:
- Small Business 15-year exemption
- Small Business 50% active asset reduction
- Small Business retirement exemption
- Small Business rollover
Consult your tax accountant to assess eligibility. In many cases, when a liquidator distributes capital gains from asset sales, tax savings can be significant.
Tax Benefits for Pre-CGT Reserves
In the realm of tax benefits, Member’s Voluntary Liquidation offers significant advantages to companies holding reserves from pre-CGT asset sales. Assets acquired before September 1985 generally evade taxation when sold. However, when these profits are distributed as dividends, they become subject to taxation. Liquidator distributions present a noteworthy exception, treating capital gains as “capital proceeds.” This unique treatment has the potential to yield substantial tax savings.
Winding Up a Company Limited By Guarantee
Liquidating a company Limited by Guarantee, often found in the not-for-profit sector, involves specific rules delineated in the company’s Constitution. Typically, surplus assets do not go to members but are directed towards a “like-minded institution.” Conducting this process mandates the involvement of a Registered Liquidator.
Winding Up a Co-Operative
The liquidation of a Co-Operative adheres to distinct regulations outlined in various state Co-operatives Acts. Excess assets are generally allocated to a designated not-for-profit organisation.
Costs Associated with MVL
The expenses associated with a Members Voluntary Liquidation can vary, contingent upon factors such as the necessity for the Liquidator to manage cash distribution and the number of shareholders involved. Please do not hesitate to contact us for a tailored quote. Our operational efficiency allows us to deliver a quicker and cost-effective liquidation process in comparison to larger firms.
Recognising that each company boasts its own unique circumstances, we strongly encourage you to reach out to us for a discussion precisely tailored to your specific needs. It is worth noting that, following a thorough assessment, we may even propose cost-effective or potentially free alternatives to address your requirements. Your company’s distinct situation is our foremost consideration, and we are committed to providing you with bespoke solutions.