How do contingent liabilities affect an MVL?
Members’ Voluntary Liquidation (MVL) is a formal procedure directors can use to close a solvent business. For a company to be solvent, it must be able to pay its debts and have assets that exceed the value of its liabilities, including its contingent liabilities.
Understanding contingent liabilities is crucial to determining if your company is solvent and whether you can close it using a Members’ Voluntary Liquidation. Here we discuss what contingent liabilities are, the role they play in an MVL and the risks company directors should be aware of.
What happens during a Members’ Voluntary Liquidation?
Licensed insolvency practitioners appointed – A letter of engagement is signed, formally appointing a licensed insolvency practitioner to act as liquidator and advise you throughout the Members’ Voluntary Liquidation process.
Declaration of solvency signed – The declaration of insolvency is a legal document that must be signed to testify that your business is solvent, and therefore, able to settle liabilities in full within 12 months of the liquidation commencing, including interest, with enough funds remaining.
General meeting of shareholders held – A general meeting is held to allow shareholders to vote in favour or against the Members’ Voluntary Liquidation proposal. If 75% of shareholders vote in favour of the MVL, the insolvency practitioner takes control of the company, and the liquidation process commences.
Company liquidation commences – The company enters Members’ Voluntary Liquidation, the relevant documents are prepared and submitted, and parties are notified, such as HMRC and Companies House. The liquidation is advertised in the Gazette, making it a matter of public record and creditors are invited to submit their claims at this stage.
Funds distributed – Once confirmation is received that the company has no outstanding liabilities, capital distributions are made to shareholders, and the company is closed and removed from the Companies House register after three months.
What are contingent liabilities?
Contingent liabilities are debts you have not incurred but could do in the future based on certain events. For example, if your company enters liquidation, a liability you could reasonably expect to incur in the future is employee claims for redundancy or notice pay.
Importantly, not every contingent liability becomes an actual liability, but you must account for contingent liabilities in certain situations, including when the company enters a Members’ Voluntary Liquidation.
When you initiate an MVL, you must sign a Declaration of Solvency. If you do not consider the company’s contingent liabilities when assessing its financial position and it subsequently experiences financial problems during the liquidation, you could face serious consequences.
Examples of contingent liabilities in an MVL
There are several examples of contingent liabilities that can become actual liabilities during a solvent liquidation, including:
- Ongoing or expected legal cases – Creditors may make a legal claim against you for a disputed debt or there could be an ongoing employment tribunal.
- Loan guarantees – If the company has acted as a loan guarantor for a third party it could become liable for that debt.
- Product warranties – You may become liable for customer claims for faults and other issues if you provide warranties on your products.
Contingent liabilities: When an MVL turns into a CVL
Throughout the Members’ Voluntary Liquidation, the liquidator is responsible for ensuring the company’s assets cover all the existing and contingent liabilities. Where there are outstanding debts, they will set a deadline for the creditors to submit their claims and pay them from the company’s profits.
The issue comes where a contingent liability turns into an actual expense that the company cannot pay. The company’s liabilities are now greater than its assets, making it technically insolvent. As a result, the liquidator may replace the MVL with an insolvent liquidation procedure called Creditors’ Voluntary Liquidation (CVL).
The other issue is that to enter a Members’ Voluntary Liquidation, you must sign a Declaration of Solvency. The fact the company has become insolvent after entering the MVL shows that, whether knowingly or otherwise, you made the declaration falsely, which is considered an act of perjury. That can lead to fines, director disqualifications and even imprisonment in the most serious cases.
What are the implications of contingent liabilities for company directors?
You should always include contingent liabilities in your financial statements as it presents a clearer picture of the company’s financial position. That becomes even more important when you want to close the business using a voluntary liquidation procedure.
When you decide to liquidate your limited company, it’s highly advisable to contact a licensed Insolvency Practitioner like the team at Solvent Liquidation in the first instance. We can provide further guidance on contingent liabilities and accurately determine your financial status to ensure you do not make a false Declaration of Solvency.
How can we help?
If you want to close your business but are unsure whether a Members’ Voluntary Liquidation is suitable, please get in touch to arrange a free, same-day consultation. We can fully assess your company’s financial position, including contingent liabilities, and guide you seamlessly through the MVL process.
How can Solvent Liquidations help limited company directors?
At Solvent Liquidations, we believe that closing a solvent business should be an expertly managed, stress-free process that guarantees the quick distribution of funds and a tax-efficient exit. Our team of licensed insolvency practitioners and company liquidation specialists are all you need to close a solvent company efficiently and with ease. We are the UK’s number one provider of company liquidation services and are trusted by company directors nationwide.
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