For many owner-managed businesses, a Members’ Voluntary Liquidation (MVL) has long been regarded as the orderly final chapter of a successful company.
The business has ceased trading or been sold, liabilities have been settled, shareholders wish to extract the remaining value tax-efficiently, and an Insolvency Practitioner is appointed to wind up the company before distributing the surplus.
Compared with an administration or Creditors’ Voluntary Liquidation, an MVL has often been viewed as the relatively straightforward end of the insolvency spectrum. But recent developments suggest that perception may need revisiting.
Following the High Court’s decision in the Novalpina case, HMRC has now issued guidance to insolvency practitioners on how it expects MVLs to be handled where tax affairs remain unresolved. While the guidance is aimed primarily at practitioners, its implications extend well beyond the insolvency profession.
The underlying message is simple: greater diligence is expected before an MVL begins.
The statutory foundation of an MVL has always been the directors’ Declaration of Solvency, confirming that the company will be able to pay all of its debts, together with any statutory interest, within 12 months.
Historically, many directors understandably interpreted this as a relatively straightforward assessment of whether the company had sufficient assets to meet known liabilities.
The Novalpina judgment reinforces a more demanding approach. The emphasis is not simply on whether the company appears solvent today, but whether every creditor can, in reality, be paid in full within the statutory period. Contingent liabilities, unresolved tax matters and uncertain claims therefore assume much greater significance.
For directors, that raises the importance of carrying out thorough due diligence before signing the Declaration of Solvency.
In many cases, this will be the first (and probably only) time business owners have encountered an insolvency practitioner. The process may be solvent, but it should not be approached casually.
HMRC’s guidance reinforces the importance of addressing tax issues at the earliest possible stage. In practical terms, it encourages insolvency practitioners to establish the company’s tax position as soon as possible, ensuring outstanding returns are submitted promptly and engaging with HMRC where liabilities remain uncertain.
That may sound procedural, but there is a commercial point behind it. If corporation tax computations remain outstanding, enquiries are unresolved or returns have not been filed, HMRC may be unable to quantify its claim. Until those issues are addressed, completing the MVL within the statutory timetable becomes more challenging.
The guidance also reflects HMRC’s increasingly active role in the insolvency landscape. From the restoration of Crown Preference in 2020 to its more robust approach to tax debt recovery and Time to Pay arrangements, HMRC has become an ever more influential stakeholder in business restructuring. The latest guidance is another reminder that tax issues are no longer something to address towards the end of the process.
For directors contemplating a solvent wind-down, tax should therefore become an integral part of the planning process rather than something left to resolve once the liquidation has commenced.
There is no suggestion that MVLs have become significantly more difficult or that they should be avoided, but preparation clearly reduces risk.
Indeed, recent Insolvency Service research examining more than 2,300 MVLs found that 95% paid creditors within the required 12-month period, while virtually every creditor ultimately received payment in full. Conversions into Creditors’ Voluntary Liquidations were extremely rare. The evidence suggests that the process remains highly effective.
What has changed is the level of preparation expected before directors make their Declaration of Solvency.
Companies with complex tax affairs, historic transactions, overseas operations or unresolved liabilities are likely to benefit from taking advice earlier and ensuring potential issues have been identified before entering the formal process.
There is a tendency to think of an MVL as an administrative process that begins once trading has ceased. Increasingly, it should be viewed as a forward-looking exercise that starts well beforehand.
That means reviewing contingent liabilities, confirming tax affairs are up to date, considering any outstanding contractual obligations and ensuring the Declaration of Solvency is based on robust evidence rather than reasonable optimism.
For most companies, the outcome will be unchanged. The liquidation will proceed smoothly and shareholders will receive the remaining value of their investment.
But the Novalpina judgment and HMRC’s response serve as a timely reminder that, even where a company is solvent, winding it up successfully depends as much on careful preparation as sound finances.
The lesson is not that MVLs have become riskier. Rather, they have become less routine. Directors can no longer assume that a solvent balance sheet alone is enough. As HMRC’s latest guidance makes clear, preparation, evidence and early engagement have become just as important as solvency itself.
Written by James Bryan, Senior Manager at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.