Benefits of an MVL
Proceeds from a pre-Capital Gains Tax (CGT) asset are not taxable to the company. However, the proceeds are considered ordinary income to the shareholder on distribution if the distribution is made outside of the liquidation. Where a liquidator distributes the proceeds from a pre-CGT asset there is (subject to certain conditions being met) an exemption to that rule. Shareholders may therefore benefit from significant tax savings.
Liquidation provides certainty in respect of outstanding liabilities. Creditors are required to lodge their claims with the liquidator within a specified period. If claims are not received by that date and funds are then distributed, the creditor will lose its entitlement to claim against the company.
A Members Voluntary Liquidation (MVL) is a simple and cost effective means of finalising a company’s affairs and distributing its assets to creditors (if any) and shareholders. It does not necessarily entail the realisation of assets, as assets can be distributed in specie.
When is an MVL Suitable?
The procedure may be used when:
- a company has come to the end of its useful life
- it is anticipated that the company has sufficient funds to meet all of its liabilities in full within 12 months of the date of liquidation
- in some circumstances a MVL can distribute pre-CGT assets (prior to September 1985) held by the company, tax free
What Happens During the Liquidation?
Following the appointment of a liquidator:
- the powers of the directors cease (except where delegated by the Liquidator)
- ASIC will be informed of the liquidation
- notice to potential creditors to submit any claims will be advertised on ASIC Published Notices
- the liquidator will collect and realise the assets of the company where appropriate and seek to agree and pay any outstanding claims of all creditors, including the ATO
- the liquidator will obtain clearance in respect of the company’s tax affairs up to the date of the liquidation
Following tax clearance being obtained from the ATO, the liquidator will distribute any surplus assets to the company’s shareholders, which may be done by distributing them in specie or by way of a cash distribution.
Once all of the assets of the company have been realised and/or distributed to shareholders, the liquidator will lodge an end of administration return with ASIC, 3 months after which ASIC deregisters the company.
What are the Steps to Liquidation?
An MVL can be initiated by circular resolution executed by the directors and shareholders or by holding separate meetings of directors and shareholders. In either case, there are two key steps to appoint a liquidator to an MVL.
- Passing of resolutions by the directors and execution of Declaration of Solvency
- Passing of resolutions by members
The liquidation commences from the time of passing the special resolution by shareholders. From that time, the directors’ powers cease and the liquidator controls the affairs and assets of the company.