Insolvency Issues

[insolvency101]

When is a Members Voluntary Liquidation Viable?

An MVL which stands for a Members Voluntary Liquidation is a process where directors and shareholders of a viable and solvent entity winds up its affairs after having passed a resolution and appoints a liquidator to realize its assets, sell them and distribute the proceeds to suitable stakeholders with creditors given priority above all.

Not everyone can take on an MVL and you need to have the right reasons for it. Plus, a business must first prove its solvency otherwise a Creditors Voluntary Liquidation will take part instead. This is under the guise that no insolvent entity can escape its obligations. That being said, here are some of the viable motives that call for a Members Voluntary Liquidation.

#1: DEATH

When a significant member to the organization whose presence is highly crucial in its affairs and operations dies, a company may find itself having to come to a close. The same is true when such individual resigns or retires. This is highly common in industries where the expertise of a single individual affects and bears the whole entity.

#2: COMPLETION

All organizations, for profit or not, are built upon a purpose or objective. When the time comes that such objective has been fulfilled and completed, an MVL may be called for to formally close the business.

#3: SUCCESSORSHIP

If there is no willing or qualified heir and successor to a business, owners may consider closing it instead either to distribute and to enjoy the profits or reinvest it elsewhere. This is highly common in family run and owned corporations where the children have no interests in succeeding and running the family mill and would want to pursue other careers.

#4: RISKS

The company might be doing fine today but should there be any circumstances that create risks tantamount to huge losses then winding up may be considered. For example, with the current shifting from plastic to paper bags, plastic manufacturers may find themselves liquidating now when they are still solvent than later when they are already insolvent.

#5: RETIREMENT

Lastly and by far the most common reason that call for a Members Voluntary Liquidation, the retirement of owners and directors may also drive the action. We all want to enjoy the fruits of our labor but considering the fact that the company and its owners are two separate and distinct personalities in the eyes of the law, the former must first be liquidated before its assets can be transferred into the personal accounts of the latter.

[insolvency101]

What Creditors Get Out of a Members Voluntary Liquidation

A Members' Voluntary Liquidation or MVL is where the directors of a solvent company adopt a resolution to intentionally wind up the business and appoint a liquidation practitioner or liquidator to realize the entity’s assets, sell them and distribute the proceeds to creditors, owners and shareholders.

Unlike other kinds of liquidation, the MVL is unique in such a way that it is taken by a solvent company or one who has enough resources to cover expenses and debts in full for a minimum of twelve months or a whole fiscal calendar. In other words, such companies are fully operational with good cash flows and not in debt.

Now you might wonder, why even call for a Members' Voluntary Liquidation when you’re not even having financial difficulties? The reasons here will vary but keep in mind that no business entity will shut down without it fully considering the decisions. It is always for a valid reason. Some of the reasons to an MVL include but are not limited to the following:

·         The completion and/or cessation of the organization’s purpose

·         The absence of an adequate and willing successor or heir to the business

·         The death, loss, retirement or resignation of a significant member to the organization

·         The likelihood of imminent risks that could potentially hurt the company in the future

·         The owners’ wish to retire and revert back their investments into their personal accounts

Now how about the creditors? What will they get from a Members' Voluntary Liquidation? Will they be hurt by it?

If you’ve read the definition provided above carefully, it says that the proceeds from the liquidation of the company’s assets are to be distributed as spearheaded by the liquidator. This distribution is done in favor of the creditors which mean that they will be paid in full first before any amount is given to the owners, directors and shareholders. This should be applicable for at least the provided time period of twelve months.

Furthermore, their rights and interests are protected because companies who plan to take a Members' Voluntary Liquidation must first accomplish and submit a Statutory Declaration of Solvency explaining and demonstrating their financial position and creditworthiness. The law does not permit an insolvent business to take on an MVL as that would be seen as a fraudulent action against creditors in which case the process will be reversed and made into a Creditors’ Voluntary Liquidation instead.

[insolvency101]

The Different Kinds of Corporate Liquidations by expert insolvency practitioners

Liquidation has been defined as the process of selling off a company’s assets, distributing the proceeds to creditors and stakeholders and the cessation of trade and operations. Did you know that there are in fact three types of liquidation? Expert insolvency practitioners are here to help us know more about them, how they differ and how they are similar to each other. Read on and add knowledge to your treasure chest of ideas.

The first type is where the company is still solvent or in short is still able to pay their liabilities as they fall due but would like to stop operations for other reasons. This is what we call the MVL or MEMBERS’ VOLUNTARY LIQUIDATION. Any debts will be paid out using the existing available assets and the rest will be distributed accordingly to the shareholders.

To name a few reasons why some business go down this path are: the end of the company’s useful life, death of a vital member of the organization, lack of heir or successor. In order for this liquidation to take place, a state declaration of solvency is to be complied by the directors.

The CVL or CREDITORS’ VOLUNTARY LIQUIDATION on the other hand is done willingly by an insolvent company’s shareholders who resolve to stop trade and operations after having carefully studied and concluded that there are not enough resources to pay existing debts.

How do you know if your company is insolvent? You can use two tests namely the critical test and the negative net assets test. In the former you have to take a look at cash flows and determine if the inflows are greater than the outflows and such will suffice to pay off expenses and liabilities while still gaining profits. In the latter, it tests whether the assets are greater than or less than the liabilities.

Lastly we have the COMPULSORY AND FORCED LIQUIDATION which often arises due to the petition raised by creditors to the court who in turn has summoned an order to wind down operations. Of the three, this is by far the worst way to wind down and is a terrible blow to the company brand, image and reputation. It is done by the creditors who have been unpaid and have found no other resort to claim the amount owed to them.

So there you have it. AABRS has given us quite a head start at understanding the different types of liquidations.