Liquidation for Solvent Companies

Liquidation for Solvent Companies

When a company is solvent, the directors and members can choose to formally wind up the company. This process is known as a Members’ Voluntary Liquidation (MVL). An MVL is a procedure to end the affairs of a solvent company in an orderly way. It involves appointing a liquidator to realise assets, pay liabilities, and distribute any surplus to shareholders.

A solvent company might enter an MVL when:

• It has fulfilled its purpose and is no longer needed.
• The business has been sold, and remaining affairs must be finalised.
• Shareholders wish to distribute profits or assets in a structured, compliant way.
• Directors want to simplify a corporate structure or retire.

MVLs are also sometimes used for tax planning, because distributions to members can have more favourable tax treatment than other alternatives. But that depends on individual circumstances and professional advice.

Legal requirement: Declaration of Solvency

Before placing a company into an MVL, the directors must make a Declaration of Solvency. This declaration must state that the company can pay all the debts in full within 12 months of the start of winding up. This is a legal requirement under the Corporations Act 2001. Making a false declaration can lead to penalties.

What happens in an MVL?

Once the declaration has been made and members agree to wind up the company:

1. Shareholders pass a special resolution to wind up the company.
2. A liquidator is appointed to manage the process.
3. The liquidator realises all assets and ensures all debts are paid.
4. Any surplus assets are distributed to shareholders, after creditor payments.
5. The company is then deregistered when final reports are lodged.

Throughout this process, ASIC must be notified of the key steps such as the special resolution and liquidator appointment.

Why use an MVL instead of Deregistration?

Some small companies deregister without a formal liquidation. However, deregistration only applies to a company that has no significant assets or liabilities. If the company has funds or assets to distribute, an MVL is often the more appropriate method of closing it properly.

What an MVL achieves

An MVL:

• Provides a clean legal closure of the company affairs.
• Allows a liquidator to ensure creditors are paid and everything is finalised properly.
• Is sometimes more tax efficient than other methods of company closure (depending on tax positions).

Risks and considerations

Although an MVL is a wind-up process for a solvent company, risks can still arise if:

• The company is incorrectly assessed as solvent.
• Unexpected liabilities emerge after liquidation has begun.
• The Declaration of Solvency is challenged because it was not made on reasonable grounds.
• The liquidation may convert into an insolvent wind-up if it later becomes clear that the company cannot pay its debts within 12 months.

Do you have more questions about our Company Liquidation? Read our full guide here