A members voluntary liquidation (“MVL”) is a formal process of finalising the affairs of a solvent company, distributing any surplus assets to members before it is formally deregistered. Advisors should consider the benefits of a MVL as an option for their clients.
The mechanics of commencing the MVL process are relatively straight forward. Directors consider the company’s financial position, agree that it can pay all debts in full within twelve months, sign and lodge a declaration of solvency and call a members meeting to pass the requisite resolution. The Liquidator’s responsibility is then to realise the assets, settle the claims of any creditors, obtain a taxation clearance and then distribute any surplus assets to the members.
Sometimes the assets of a company have already been distributed to the members and it is open to the members agreeing to simply apply for voluntary deregistration of the company without going through the MVL process.
This blog seeks to identify some of the factors that drive some directors and members to decide whether to go through a MVL process or apply for voluntary deregistration. Sometimes the drivers are not always obvious.
Taxation is a large driver and has very tangible financial benefits for the members. In circumstances where the company derived a mixture of retained earnings and capital profits, the Income Tax Assessment Act 1936 (“ITAA”) provides relief to members in certain circumstances where distributions are made by a Liquidator that would not otherwise be available. A successful company commonly has a mixture of accumulated profits and capital reserves. The declaration of a dividend and distribution of these profits and reserves prior to the appointment of a Liquidator will be fully taxable as dividends to the members. Dividends subsequently declared by a Liquidator can have a different tax effect.
The two main categories of exemptions afforded to members relate to capital profits generated by a company from pre-CGT assets (ie. acquired prior to 20 September 1985) and small business CGT concessions. If the same dividend was declared by a Liquidator and the financial accounts underpinned the identification of relevant reserves, then the tax free status of the reserves would flow to the members own tax return. We would always commend that directors obtain specialist taxation advice on the company’s financial position as it should also take into account the individual tax positions of the members. It is not uncommon for external tax accountants dealing with large and complex transactions to engage a taxation lawyer to advise on the manner in which funds should be paid out to members and when a MVL should commence. This sometimes leads to conflict with members who are keen to get their hands on the funds!
Another driver to undertake a MVL is to “clean up” corporate entities that have achieved their original purpose to save on annual fees and accounting costs. We have seen companies that have sat around for close to thirty years since the last business activity was conducted. Whilst this is an extreme, it highlights that costs can mount up if there is no purpose to maintaining the company.
Sometimes in family businesses, conflict arises when it comes to distributing assets when a company has served its purpose. Generational change is a large driver for this as children of the primary business or investment operators seek to go their own financial ways. From time to time a Liquidator is charged with the responsibility of distributing assets in specie, for example real estate. Sometimes it is the distribution of loan accounts in specie in unequal proportions to the respective shareholdings. An independent Liquidator is well equipped to be the arbiter in this situation.
Risk management is another relatively unheralded reason why some external accountants suggest to their clients to bring a company to a close via a MVL. The prospect of a public liability claim or personal injury claim in many cases is not identifiable at the time that the company is in a position to cease its existence and head towards deregistration. We have seen situations where a company has completed a period of enterprise and become dormant before being sold as a “shelf company” to another a family member or unrelated party. Given the common time lag between the event giving rise to the claim and the eventual claim against the company and or insurance company, this can have devastating consequences on the new members.
It is more difficult to reinstate a company that was deregistered after a MVL was completed because it will require an application to Court. We have seen many examples where companies that were deregistered by failure to pay annual fees or an application was made to deregister, were reinstated upon an application direct to the Australian Securities and Investments Commission (“ASIC”).
When a company is deregistered after a MVL, the books and records can be destroyed a lot earlier than current requirements to hold records for up to five years. In circumstances where the members passed a resolution to provide the Liquidators with authority to apply to ASIC for the early destruction of books and records, the records can generally be destroyed six months from the date of deregistration subject to ASIC approval. This can provide a significant cost saving on different levels.
Whilst Dye & Co. Pty Ltd is a specialist insolvency advisory company and does not provide any taxation advice or other accounting services, we can assist with providing an efficient means of maximising client returns via a MVL. We are regularly asked to provide advice regarding the MVL process as a forerunner to an ultimate MVL appointment. We can assist company advisors to minimise the amount of work to be done during the MVL period thereby reducing the cost of the process. Anyone seeking further advice on the merits of undertaking a MVL should not hesitate to contact any of our directors.