The term “liquidation” is frequently associated with financial collapse, fraudulent activities or creditors losing out.  As a result, the phrase often gets a very negative “feel”.  However, amidst this negative perception, there exists one form of liquidation that offers a very positive outcome, and that is a solvent liquidation known as a Members’ Voluntary Liquidation (MVL). 

An MVL is a voluntary and planned process initiated by a solvent company.   This option is pursued to ensure a smooth and organised distribution of its assets, assuring that creditors are adequately compensated. 

When are MVLs used?

MVLs are often used when a company has finished its role in business.  For example, we are often called on to help with an MVL where a business owner has passed on his business to his children, but they have no interest in continuing the operations.  The business itself is sold, but the corporate shell remains.  Provided that the shell is solvent, in that it can pay all creditors in full, it can then be wound up via the MVL process and then deregistered. 

In a similar way, we are seeing more MVLs used when there is a restructuring plan for a business.  For example, an operating business may want to “silo” some of its operating divisions, or maybe get some asset protection mechanisms in place by transferring intellectual property to another company.  Or perhaps look at risk management by transferring staff to another company. 

As a result, there are often companies that no longer have any specific purpose once assets and liabilities have been transferred, and the MVL process is a perfect way to deal with these residual entities. 

Saving costs and minimising risk

Maintaining and monitoring the status of numerous companies can have substantial disadvantages in terms of costs and efficiencies.  If you do a cost-benefit analysis on the maintenance of a number of companies, taking into account filing fees, costs of compiling and lodging no-income accounts and tax returns, and just general management time and costs, the dollars add up. 

You can save those costs and minimise risk by looking at the MVL process to clean up these entities.  Imagine if you had 20 entities sitting after a clean-up or sale of business – the costs would quickly add up! 

Deregistration versus MVL?

We often get asked why ASIC does not just strike off these companies?  

Certainly, that’s an option once all assets have been realised and liabilities paid.  However, deregistration in this manner doesn’t give the degree of certainty that an MVL can provide. 

For example, if a company is deregistered without going through the MVL process, its registration can be reinstated on application to ASIC.  If a company has previously been trading, and after deregistration, an unknown creditor surfaces and makes claims against the company, they could apply to ASIC to have the company reinstated.  This may result in all sorts of claims the directors and shareholders need to deal with.  

If the company goes through the MVL process and then is deregistered, reinstatement can only be done by application to Court, and this is a much more onerous task with higher hurdles to jump for any claimant.  For example, the claimant would have to show that the MVL process was done to avoid paying that claim. 

Tax benefits

The MVL process can also provide tax benefits if a distribution is made by a liquidator rather than as a dividend in the normal course of operation.  This particularly applies to pre-CGT assets, which generally become tax-free if distributed by a liquidator.  So it’s always worth getting good tax advice before any such distributions are made. 

Avoiding director penalty notices

Another advantage relating to the use of MVLs is that appointment of a liquidator is a “stop action” against director penalty notices issued by the Australian Taxation Office. 

Simply deregistering a company while there is a chance that a tax debt is still outstanding increases the risk of a director penalty notice being issued to directors.  This creates the subsequent risk of personal liability for that debt without the ability of directors to build a defence against such a claim by the company going into liquidation.   

Using the MVL process is an efficient and cost-effective way of distributing assets to shareholders or reorganising corporate affairs to maximise efficiency and asset protection. 

If you are considering whether a Members Voluntary Administration might be useful for you or one of your clients, contact one of our experienced team at dVT Group at (02) 9633 3333 or by email at mail@dvtgroup.com.au.

dVT Group is a business advisory firm that specialises in business turnaround, insolvency (both corporate and personal), business valuations and business strategy support.