Choosing Between a Members Voluntary Liquidation and Deregistering a Company

Not every Liquidation means the company is insolvent and cannot pay its debts. Some liquidations allow for the tax effective distribution of value when a business is to be closed.  Such liquidations are known as Members Voluntary Liquidations (MVL) or solvent liquidations.

The decision to voluntarily wind up a solvent company through an MVL is generally a strategic one. This is because in certain circumstances using the MVL process can provide benefits to the company and its shareholders, particularly in the context of Capital Gains Tax (CGT).  

In this article, we will discuss MVLs, including why a company might choose MVL, the process behind MVL, a comparison to deregistration and the consequences of such a process being used. 

Benefits of an MVL

An MVL may be used by a company to be voluntarily wound up. This may be suitable to companies where:

• There may be limited or no opportunities for growth.
• The company may no longer be required.
• The directors may no longer be able to run the company (retirement, moving abroad etc.)
• A group of companies may need to be restructured.
• The directors and shareholders may want to distribute the company’s assets to a more CGT friendly environment.

Benefits of an MVL include:

• an effective means to wind up a solvent company in relation to tax.
• a winding up causes the least disruption and uncertainty as possible as it is in the control of the shareholders of the company.
• assets of the company being distributed in a considered and orderly manner, allowing shareholders maximum returns.

However, a disadvantage of an MVL is that creditors may challenge this shareholder driven process, if they believe their interests are being treated with prejudice. It is the role of liquidators to ensure any creditor’s claims are treated fairly and if valid are paid in full.

Process for an MVL

In summary, the process for an MVL is as follows:

1. A meeting of directors is held.
2. Director’s sign and lodge a Declaration of Solvency with ASIC.
3. Director’s provide notice of meeting of members. Unless the consent to short notice of the meeting is received from the Company’s members, members must be provided with twenty-one (21) days’ notice of the members’ meeting.
4. A meeting of members is held where resolutions are passed including that the company be wound up.
5. The resolutions passed by members to wind up the Company are lodged with ASIC.
6. A notice of the solvent winding up of the Company is published to the ASIC website for creditors (if any).
7. The liquidator finalises the company’s affairs including lodging tax returns, paying creditors (where applicable) and making distributions to shareholders etc.
8. The liquidator lodges final returns, receipts, and payments with ASIC.
9. A final meeting of members is held (where applicable).

CGT consequences of MVL

The CGT legislation was introduced on 20 September 1985.

MVL is most tax effective in a solvent winding up for a company with pre-CGT profits or small business CGT concessions. This is because in a deregistration, these payments are treated as an ordinary dividend to shareholders, resulting in avoidable and significant tax liabilities which would not be faced in an MVL.

If an asset was acquired prior to this date, it is considered a pre-CGT asset. This means that CGT will not apply to capital profits from the asset. Generally, distributions of capital profits from a pre-CGT asset by the company to its shareholders is considered ordinary income for the shareholder, and accordingly is taxable at the appropriate rate for the entity/individual receiving such distribution.

However, the main benefit of MVL is that when capital profits from a pre-CGT asset are distributed to the company’s shareholders via the MVL process, they remain pre-CGT assets and are therefore not subject to CGT. This is unless there has been a change in the majority underlying shareholding interest of the Company which held the pre-CGT asset.

Is deregistration an alternative?

Deregistration should be considered for companies where business has ceased in circumstances where there are no liabilities, contingent liabilities or outstanding creditor claims, and the assets of the company amount to a sum less than $1,000. This process is also very timely and cost effective, and results in no further necessary compliance when deregistered. Companies must also ensure:

• All members of the company agree to deregister.
• The company is not conducting business.
• The company is not involved in any legal proceedings.
• All fees and penalties due to ASIC are paid.

Notwithstanding the timely and cost effective nature of simply deregistering a Company, utilising this method provides third parties with the opportunity to relatively easily stop a deregistration through ASIC, reinstating the company and appointing a court appointed liquidator.

In the alternative where an MVL is initiated by the shareholder(s) of the Company, any aggrieved party would be required to prove their claim to the liquidator appointed, and the liquidator would consider such claim as appropriate.

Furthermore, where an aggrieved party were to raise their claim against a Company after an MVL process had been finalised, the aggrieved party would be required to make a formal application to the appropriate court in order to reinstate the Company and pursue their claim through a creditors voluntary liquidation. Notwithstanding the time and effort required to undertake such action, this process is a much more costly exercise than halting a simple deregistration. 

Conclusion

While the liquidation of a company is usually associated with the insolvency of a company, there is a liquidation process for solvent companies which allows for the maximum returns to be available to its shareholders, specifically where pre-CGT assets are held.

Although a solvent company could go through the deregistration process, there are certain limitations, including that the company must have assets worth less than $1,000 and must not have any outstanding liabilities, meaning de-registration is a much more limiting process than MVL, and also does not have the same advantages regarding the potential for tax free distributions of pre-GCT capital gains to shareholders.