When a company decides to close using a Members’ Voluntary Liquidation (MVL), directors will usually file a signed indemnity during the procedure. Essentially, this allows the company to distribute funds amongst its shareholders without waiting for the MVL to follow the usual channels that allow for the release of funds. As this can take months, a signed indemnity, also known as a deed of indemnity, is incredibly convenient for a company’s shareholders. However, although convenient at first glance, there is a bit more to a signed indemnity than first meets the eye. If you intend to liquidate your company through an MVL, you should first know the key parts of a signed indemnity.
In this article, Clarke Bell will discuss signed indemnities, how they work, and how they fit into the wider MVL process.
What is a Members’ Voluntary Liquidation?
An MVL is a formal liquidation procedure that allows company directors to close down their solvent company voluntarily. This might be done for any number of reasons, including a director’s retirement or taking up a PAYE-role and no longer needing the company.
A licensed insolvency practitioner must be appointed to carry out the procedure, and they will help to ensure the liquidation is conducted efficiently and within the confines of the law.
In addition to being an effective method of liquidating a solvent company, an MVL offers significant tax benefits. Liquidating assets through an MVL subjects the proceeds to Capital Gains Tax, rather than Income Tax. This means that your realised assets will be taxed at a much lower rate than otherwise.
In addition to a lower tax rate, the MVL also entitles you to apply for Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief. If you are eligible (and most of our clients are), this can further decrease the amount of tax you pay on realised assets. However, it does have a lifetime limit of £1 million.
What is a signed indemnity as part of the MVL process?
Although an effective solution, MVLs take some time to complete. Generally, directors can expect the process to take somewhere between 3-6 months on average, with some larger liquidations taking up to a year and beyond. In ordinary circumstances, shareholders would then have to wait just as long before they receive any funds. If you are a director, and therefore, a company shareholder, this means waiting a significant amount of time to receive your profits.
A signed indemnity expedites the process of shareholders receiving their funds. Instead of the usual months of waiting, funds can be distributed to shareholders shortly after the signed indemnity is filed. Naturally, this is great news for directors that want to receive the profits of their hard work without waiting an extended period of time. However, if a signed indemnity is filed and an outstanding creditor makes a claim that they are owed money they have not yet received, this can cause issues. Shareholders that have received funds must return the money to satisfy the creditor’s claim.
How does a signed indemnity work?
As we mentioned, a signed indemnity allows for the swifter release of funds to shareholders, cutting out the months of waiting for the process to finish that would ordinarily take place. It does this by providing insolvency practitioners with the document they need to be able to release funds prior to the natural end of the MVL process. Specifically, a signed indemnity allows for the release of most of the liquidation’s value, while retaining the fees charged by the insolvency practitioner.
Implications of signing a deed of indemnity
The main implication of signing a deed of indemnity is that it can be actioned later on down the line. This means that if a creditor claims that your company owes them money, any funds that have been paid to shareholders must be returned. This money will then be used to pay the debt owed to said creditor.
This scenario is not one that happens often. As part of the MVL process, directors must sign a declaration of solvency. Essentially, this states that, to the best of the directors’ knowledge, the company is solvent and capable of paying its debts and liabilities within 12 months. However, mistakes do happen, and sometimes creditors that are unknown to directors will make a claim once the company enters liquidation. As the deed of indemnity states that shareholders agree to repay the funds if a valid claim comes along, this scenario would mean action can be taken against you to recover the money. As such, you should only sign a deed of indemnity if you know your company can repay any debts it has.
To ensure you aren’t signing on to anything that would jeopardise your personal finances, you should first seek professional help. Speaking with a licensed insolvency practitioner before taking any action will make you aware of any alternative options and that your company is more than capable of repaying any obligations. Going without professional advice can leave you open to problems if you haven’t made absolutely certain of your company’s financial position yourself. A false declaration of solvency is a criminal offence, one that will likely result in significant consequences for you. Moreover, if you have signed a deed of indemnity thereafter, you seriously risk your personal finances in the event an outstanding creditor makes a claim against your company.
Clarke Bell can help
If you are considering liquidating your company, either through an MVL or otherwise, then let Clarke Bell help. We have more than 28 years of experience in helping companies through difficult financial positions, be that liquidation or another solution. We can do the same for you. For a free, no-obligation consultation, contact our team today and find out exactly what we can do for you.