Members' Voluntary Liquidation (Members' Voluntary Winding-Up)

Definition

Members’ Voluntary Liquidation (MVL), also known as Members’ Voluntary Winding-Up, is the process whereby the members of a solvent company decide to voluntarily wind up the company’s affairs through a special resolution. For an MVL to commence, the company’s directors must first make a declaration of solvency, asserting that the company will be able to pay its debts in full within a specified period, typically 12 months from the commencement of winding up. The declaration must be supported by a statement of the company’s assets and liabilities.

Passing the resolution leads to the appointment of a liquidator, who is responsible for overseeing the winding-up process, including realizing the company’s assets, settling its debts, and distributing any surplus to the members. If, during the liquidation process, the liquidator determines that the company is unable to meet its financial obligations, the process transitions into a creditors’ voluntary liquidation.

Examples

Solvent Business Closure: A company that has completed its business activities and wishes to distribute remaining assets to owners without continuing operations might undergo a Members’ Voluntary Liquidation to ensure an orderly dissolution.
Group Restructuring: A holding company might choose the MVL procedure to dissolve some subsidiaries that are no longer necessary while redistributing their assets efficiently among remaining group companies.
Professional Practices: Legal or accounting firms that have reached the end of their business cycle may use MVL for orderly closure, ensuring that all clients and obligations are properly settled before disbanding.

Frequently Asked Questions (FAQs)

What is a declaration of solvency?

A declaration of solvency is a statement made by the company’s directors verifying that the company is able to pay off its debts in full within a specified period, usually within 12 months. This declaration is a prerequisite for initiating a Members’ Voluntary Liquidation.

What happens if the liquidator discovers the company is insolvent?

If the liquidator concludes that the company cannot pay its debts in full, a meeting of creditors must be called, and the liquidation process switches to creditors’ voluntary liquidation.

Who appoints the liquidator in an MVL?

The members pass a resolution to appoint a liquidator who will administer the winding-up process.

Can a Members’ Voluntary Liquidation be reversed?

Though rare, if certain conditions are met and appropriate legal procedures followed, a resolution to reverse the liquidation might be possible, provided all the members agree.

What are the legal requirements for the declaration of solvency?

The declaration must be made by all or a majority of the directors stating that they have made a full inquiry into the company’s affairs and that, having done so, they have formed the opinion that the company will be able to pay its debts in full within the specified period.

Liquidator: An appointed person responsible for overseeing the winding-up of a company’s affairs.
Compulsory Liquidation: The process of winding up a company that is insolvent, initiated by an order from the court.
Insolvency: The state where a company cannot meet its debts when they fall due.
Creditors’ Voluntary Liquidation (CVL): The winding-up process initiated by a company’s directors when they believe the company is insolvent, involving meetings with creditors.

Online References

Suggested Books for Further Studies

“Corporate Insolvency Law: Perspectives and Principles” by Vanessa Finch
“Liquidation: A Guide to Economic Market Design” by Ernesto Dal Bó and César Montolio
“Principles of Corporate Insolvency Law” by G. Moss and K. Anderson.

Accounting Basics: “Members’ Voluntary Liquidation” Fundamentals Quiz

### What is required from the directors before a Members' Voluntary Liquidation can proceed? - [ ] Establishing a new corporate venture - [x] Making a declaration of solvency - [ ] Applying to court for liquidation - [ ] Engaging with creditors > **Explanation:** The directors must make a declaration of solvency before proceeding with a Members' Voluntary Liquidation, confirming their belief that the company can pay off its debts. ### Who passes the resolution for a Members' Voluntary Liquidation? - [x] Company members - [ ] Creditors - [ ] External auditors - [ ] Board of directors > **Explanation:** The members of the company pass a special resolution to commence a Members' Voluntary Liquidation. ### What document supports the declaration of solvency? - [ ] Annual report - [ ] Income statement - [x] Statement of the company's assets and liabilities - [ ] Tax return > **Explanation:** The declaration of solvency should be supported by a statement of the company's assets and liabilities. ### If the company becomes insolvent during an MVL, to which process does it transition? - [ ] Judicial administration - [ ] Members Voluntary Arrangement - [x] Creditors' Voluntary Liquidation - [ ] Financial Reconstruction > **Explanation:** If the company becomes insolvent during an MVL, the process transitions to a creditors' voluntary liquidation. ### What must be done if the liquidator finds the company insolvent? - [x] Call a meeting of creditors - [ ] File for bankruptcy - [ ] Appoint new directors - [ ] Issue share buybacks > **Explanation:** The liquidator must call a meeting of creditors if they find that the company cannot pay its debts in full. ### Who bears responsibility for the winding-up process in an MVL? - [ ] Company directors - [ ] Corporate secretary - [x] Appointed liquidator - [ ] Shareholders' committee > **Explanation:** The appointed liquidator is responsible for overseeing the winding-up process in an MVL. ### What legal consequence can arise from a false declaration of solvency? - [ ] Mandatory civil settlement - [ ] No direct consequence - [x] Criminal offence - [ ] Tax penalties > **Explanation:** Making a false declaration of solvency without reasonable grounds is a criminal offence. ### What happens to the company’s assets in an MVL? - [ ] They become assets of the state - [ ] They are transferred to creditors immediately - [x] They are realized and distributed by the liquidator - [ ] They are held in a trust > **Explanation:** The liquidator realizes the company's assets and distributes them accordingly. ### Can the liquidation decision in an MVL be undone? - [ ] Yes, upon creditor approval - [ ] No, once resolved it is irrevocable - [x] Rarely, under certain legal conditions and mutual agreement - [ ] Yes, through a court order > **Explanation:** While not common, the liquidation decision can be reversed under specific legal conditions and mutual agreement. ### Which entity becomes involved if the company enters into creditors' voluntary liquidation? - [ ] Internal Revenue Service (IRS) - [ ] Company trade union - [x] Creditors - [ ] Local municipality > **Explanation:** Creditors become actively involved if the company transitions to creditors' voluntary liquidation.

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