When two directors mutually decide to close down their company, and are 50/50 shareholders, it can be pretty straightforward. A Members’ Voluntary Liquidation (MVL) allows a solvent company to be closed down, with the assets of the company being distributed to the shareholders.
Many directors decide they want to retire, go back into work as an employee or move abroad. It is these instances where closing down a solvent company is best done via an MVL – as by using an MVL the funds to be distributed are subject to Capital Gains Tax, rather than Income Tax.
If you qualify for Entrepreneurs’ Relief (ER) you can benefit from a 10% marginal rate on distributions. This means there can be considerable tax savings for the shareholders of the company.
Things can get complicated when two directors with a 50/50 share of the company are in disagreement about whether or not to liquidate the company.
What if only one director wants to liquidate?
It happens a lot in business. One director wants to continue running the company, whereas the other has had enough and wants to walk away from the company.
This problem can be resolved by one director resigning and leaving the other to continue running the company. However, some directors aren’t comfortable with this and would prefer the company to be liquidated and outstanding liabilities taken care of. And that’s where problems can arise.
When there are only two directors, and each has a 50% shareholding, an unresolved dispute is referred to a ‘deadlock.’ To help break the deadlock, outside mediation can be sought.
A winding up petition on ‘just and equitable grounds’
Within UK insolvency legislation there is something called liquidating the company on ‘just and equitable grounds.’
This is a method for ending a deadlock between family members in a small business. The court decides whether voluntary liquidation of the company is the best route to take. Although it is a viable option, these types of winding up petitions are quite rare. The court has to take into consideration whether they believe mutual trust and confidence has evaporated – which is often the case in a 50/50 shareholder deadlock.
Buying out a director’s shares
Another resolution to consider is one director buying the other out.
In many cases, shareholders of a company are a married couple. If that couple have entered divorce proceedings, the court may provide for a limited company divorce settlement whereby the remaining director buys out the other shareholder. The company could then continue to trade under sole ownership.
Disagreements can and do happen. It is how they are handled that is most important. Disputes can cause long-term damage to companies if they are allowed to drag on.
Free, confidential advice
If you would like advice on anything to do with a Members’ Voluntary Liquidation, just contact us now for free and confidential advice.