MEMBER’S VOLUNTARY LIQUIDATION:
Everything you Need to Know (Updated 2023)
A Member’s Voluntary Liquidation (MVL) is used to end the affairs of a solvent company and is initiated by the directors and shareholders. The primary benefit of a MVL is tax savings when distributing past profits to shareholders.
- Overview: The types of company liquidation
- Member’s Voluntary Liquidation vs. company deregistration
- How do you know you need a Members’ Voluntary Liquidation and not some other type of liquidation?
- What is the process of a Member’s Voluntary Liquidation?
- Step One – Corporate Simplification Review
- Step Two – Meeting of Directors
- Step Three – Lodgement of Declaration of Solvency
- Step Four – Notice to Members
- Step Five – Meeting of Members
- Step Six – Lodgement of Resolutions
- Step Seven – Other Notifications
- Step Eight – Practical Matters
- Step Nine – Annual Meeting
- Step Ten – Finalisation
- Step Eleven – Deregistration
- Tax Benefits – Small Business CGT Concessions
- Tax Benefits – Pre-CGT Reserves
- Winding Up A Company Limited By Guarantee
- Winding Up A Co-Operative
- Winding Up A Company Limited By Guarantee
- Cost of an MVL
- Personalised advice
Overview: The types of company liquidation
Depending on your circumstances different types of liquidation may be applicable. As a general rule:
- If your company is solvent, consider a member’s voluntary liquidation – which is used to voluntarily finalise the affairs of a solvent company;
- If your company is insolvent, consider a creditor’s voluntary liquidation – the most common type and the one that a director and shareholders use to voluntarily appoint a liquidator to an insolvent company;
- If you’re looking to recover a debt from a debtor that is a company, consider a Statutory Demand which can lead to a Court Liquidation – where the Court appoints a liquidator on application by a creditor;
- In complex internal disputes, such as a director’s or shareholder’s dispute, you may go to court to have a Provisional Liquidator appointed – where the Court appoints a liquidator for a period to safeguard assets and assess the situation.
Member’s Voluntary Liquidation vs. company deregistration
Company Deregistration is simpler, quicker and cheaper than a members’ voluntary liquidation. So why not always choose company deregistration? An application for deregistration can only be made when all of the following conditions are met:
- all the members of the company agree to the deregistration; and
- the company is not carrying on business; and
- the company’s assets are worth less than $1000; and
- the company has paid all fees and penalties payable under the Corporations Act; and
- the company has no outstanding liabilities; and
- the company is not a party to any legal proceedings.
There may also be situations where it is prudent to choose a members’ voluntary liquidation rather than deregistration. Try answering the following questions:
- Do you want a high level of assurance that a company cannot be reinstated?
- Did the company operate in a high-risk industry, for example, where public liability claims sometimes arise?
- Will any franking credits or tax-free dividends be lost by the deregistration of the company?
- Are there any outstanding issues the company is still dealing with?
If you said “Yes!” to any of the above questions, then we recommend a members’ voluntary liquidation rather than a company deregistration.
How do you know you need a Members’ Voluntary Liquidation and not some other type of liquidation?
A members’ voluntary liquidation is the “least drastic” type of liquidation, so should be your first consideration. However, you can only proceed with a MVL if the company is “solvent”. That is, the directors must be prepared to pass a resolution that the company is solvent because it can pay all of its debts within 12 months. When considering the debts of the company, that will include any amounts owed for tax. If the company cannot pay all of its debts within 12 months then the directors would need to consider another type of liquidation, commonly creditors voluntary liquidation.
What is the process of a Member’s Voluntary Liquidation?
We have provided below, the process and a timeline for a members’ voluntary liquidation. You don’t need to worry about the detail – at Insolvency Solutions Group we prepare all the documents for you and lodge them on time to ensure the fastest possible liquidation at the lowest possible fee.
Step One – Corporate Simplification Review
Conduct a review of matters to be attended to in order to position a company or group of companies for members’ voluntary liquidation.
Step Two – Meeting of Directors
At a meeting of directors a resolution should be passed that a Declaration of Solvency be signed and that a general meeting of members be called to consider the resolutions that the company be wound up, that the assets be distributed and that a liquidator be appointed.
Step Three – Lodgement of Declaration of Solvency
The original of the Declaration of Solvency must be lodged before the date on which a notice of meeting of members is sent out.
Step Four – Notice to Members
Members must ordinarily receive 21 days notice of the proposed members meeting. Commonly we will use a Consent to Short Notice, as long as 95% of shareholders agree to that. This allows the Meeting to be called immediately.
Step Five – Meeting of Members
At the meeting of members, the following resolutions should be passed:
- that the company be wound up;
- that a liquidator be appointed;
- the amount of the liquidator’s remuneration;
- the date when the books and records of the company can be destroyed.
These Resolutions are all quite standard. Commonly they are done by “Circular Resolution”. That is, the Resolutions are separately sent to each of the Members and the Resolutions are “Passed” when the last shareholder signs.
Step Six – Lodgement of Resolutions
After the resolutions are passed, they must lodged within seven days and the appointment is also advertised on the Insolvency Notices website. Usually, the liquidator will also place an advertisement on the Insolvency Notices website asking for any creditors who have a claim against the company to notify the liquidator.
Step Seven – Other Notifications
The liquidator then notifies a long list of interested parties of the liquidation, such as the Australian Tax Office.
Step Eight – Practical Matters
The liquidator will attend to a long list of matters to finalise the affairs of the company. This will include the finalisation of tax returns, realisation of assets, payment of creditors and the distribution of surplus assets to shareholders.
Step Nine – Annual Meeting
If the liquidation continues for more than 12 months an Annual Meeting of Members must be held. Usually, we have finalised the liquidation well before 12 months and so an Annual Meeting is not required.
Step Ten – Finalisation
When the affairs of the company are fully wound up the liquidator will call a Final Meeting of Members giving at least one months notice. That meeting is advertised on the Insolvency Notices website. The liquidator will lodge a Final Return within seven days and a Final Liquidator’s Account of Receipts and Payments within 30 days.
Step Eleven – Deregistration
The company is automatically deregistered three months after the return for the final meeting.
Tax Benefits – Small Business CGT Concessions
One of the main reasons to do a Members Voluntary Liquidation is to maximize the Capital Gains Tax concession benefits. These will sometimes exist where there are proceeds from the sale of a pre-CGT asset or where there are Small Business CGT concessions available. Below are some details on the Small Business CGT Concessions and then we explain the significant benefits of a Members Voluntary Liquidation in getting the proceeds of an asset sale to the shareholders.
Small Business CGT Concessions for your business
There are four types of CGT Small Business Concessions:
- Small business 15-year exemption*
- Small business 50% active asset reduction*
- Small business retirement exemption
- Small business rollover
You should obtain advice from your tax accountant to see if you qualify for the above concessions. But in general, where a company is eligible to apply for the first two types of concessions above, part or all of the capital profits arising from a CGT event may be exempted from tax at the company level. However, when the amounts are distributed to shareholders (via a dividend), the amount becomes ordinary income, and thus, taxable. The exception to a dividend being taxable is when the distribution is made by a Liquidator. When a liquidator makes the final distribution, capital profits are treated as “capital proceeds” from the cancellation of the shares. That can result in a very significant tax saving. Please note that the above only applies to the distribution of the capital profits. If your company has retained earning (which is also subject to distribution), the amount will be deemed dividend and taxable.
We suggest that you firstly discuss the sale of your business with your tax accountant to see if you will qualify for the Small Business CGT Tax Concessions and if so, you should then contact us to receive the extra tax benefits received through a Members Voluntary Liquidation.
Tax Benefits – Pre-CGT Reserves
One of the main reasons to consider a Members Voluntary Liquidation is to receive the significant tax benefits of a liquidator’s distribution if your company has reserves from the sale of a pre-CGT asset. We have explained below the pre-CGT asset tax rules and then how an MVL can work for you.
Do you have proceeds from the sale of a pre-CGT Asset?
Capital Gains Tax laws were introduced in September 1985. However, those rules were not backdated and so if you, or your company have assets that were acquired prior to September 1985, then they remain classified as “pre-CGT” until their eventual sale. That is, tax will not apply to profits on a pre-CGT asset. There are exceptions to that general rule, so you should speak to your tax adviser to ensure your assets are pre-CGT. So, proceeds from the sale of a pre-CGT asset is not taxable to the company. However, when it comes to paying that gain to shareholders, the payment will become ordinary income, and thus, assessable for tax purposes, if your company simply declares a dividend to its shareholders. That is, those benefits will be lost or reduced. However, an exception to that rule applies when the distribution is made by a Liquidator. If a liquidator distributes a capital gain from a pre-CGT asset sale, then that gain remains tax free for the shareholders.
How much does this benefit the Shareholder?
The benefit depends on what type of shares you are holding:
- Pre-CGT shares: the capital proceeds distributed will not be taxable.
- CGT shares: you will need to check whether your shares satisfy the 80% test to determine what benefits apply. If your shares satisfy the test, they qualify as active assets under the small business CGT concessions. This means that you can then apply for further concessions (50% CGT discount and small business CGT concessions) to the capital proceeds you received to minimize taxable income.
It is a little complicated but if your company has a pre-CGT property or where it has made a gain from the sale of a pre-CGT property, it is likely shareholders can receive significant tax savings with the use of a Members Voluntary Liquidation.
Winding Up a Company Limited By Guarantee
Winding up a company that is Limited by Guarantee is relatively uncommon, simply because there are far fewer companies Limited by Guarantee than those that have Ordinary Shareholders. The winding up of a company Limited by Guarantee is still guided by the Corporations Act. Often, they are Not For Profit organisations so it is especially important to review the company’s Constitution to see what specific rules will apply in a winding-up. Most commonly, the Constitution will require that any surplus assets be distributed to a “’like-minded institution” or words to that effect. That is, the surplus assets are not distributed to the Members.
The liquidation of a company Limited by Guarantee must be conducted by a Registered Liquidator.
Winding Up A Co-Operative
Co-Operatives have been around for many years and periodically they outlive their usefulness. But the liquidation of a Co-Operative is somewhat different to the liquidation of a company. For a start the liquidation of a Co-Operative is not guided by the Corporations Act. There are a whole set of different rules that apply to co-operatives in different states. The liquidation is based on the Co-operatives Acts in those various states. Often a Co-Operative is also a not-for-profit organisation. The co-operative rules will likely specify that on winding up, any surplus assets are to go to a specified not-for-profit organization. (Because it is not-for-profit, surplus assets cannot go back to members as a “return”).
Cost of an MVL
The cost of a Members Voluntary Liquidation can vary depending on the circumstances.
The main factors are whether you need the Liquidator to handle cash in a distribution process, and the number of shareholders and availability. Contact us with the answers to these points are we will give you a quote.
Here at Insolvency Solutions Group we are small and efficient. This means we can provide a liquidation process faster and cheaper than big firms.
Every company’s circumstances are different. We strongly encourage anyone considering liquation to give us a call to discuss your specific circumstances. We may even recommend a cheaper (or free!) solution.