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Can shareholders force liquidation?
24 June 2022

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.

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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.

How Does Liquidation Affect Shareholders?

The primary aim of an appointed liquidator is to close a business down, sell its assets and raise cash to pay off as much creditor debt as possible. It doesn’t matter whether it is compulsory or voluntary liquidation; the result will be exactly the same despite the steps taken to get there. In this process all primary duty is placed with all of the insolvent company’s creditors. Shareholders are then placed next on the pecking order of precedence. For this reason, shareholders rarely receive a dividend in an insolvent liquidation process unless they also have a creditor claim.

Shareholder Rights

In a liquidation process put forward by the Court (i.e. compulsory liquidation) the appointed liquidator is not required to report to any shareholders or provide an update on proceedings. In this situation shareholders have no legal right to this information. A liquidator is also not required to hold a meeting of shareholders throughout a CVL, but a joint meeting of creditors and shareholders must be hosted at the conclusion of the process.

Committee of Inspection

In both types of liquidation (compulsory and voluntary) shareholders can request that the appointed liquidator host a separate meeting of shareholders and creditors to decide whether or not a committee of inspection is suitable. If so, it must be decided who will represent both parties on the committee. The shareholders who make the request must cover all the associated costs.

A committee of inspection provides an approval process for the liquidator’s fees and also, in some circumstances, provides an approval process for the use of some of their powers. The transfer of shares or a change of shareholder status must have written consent from the liquidator or the Court. In this process, a liquidator can call for any holders of unpaid shares to pay the amount outstanding.

Capital Loss

Should a liquidator present a written declaration that states there is very little likelihood that shareholders will receive any further distribution, shareholders can realise a capital loss. In order to do this, all shares in the company must have been purchased after the 20th of September 1985. If no such declaration has been made then the final deregistration of the company will enable realisation of any capital loss.

If you are a shareholder of a company that has been placed into liquidation, it is recommended that you seek tax advice regarding your ability to realise a capital loss.

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If you would like advice on anything to do with a Members’ Voluntary Liquidation, just contact us now for free and confidential advice.

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