Members Voluntary Liquidations
Author: Tom Murray
A Members’ Voluntary Liquidation is a popular way of extracting accumulated funds and distributing them to shareholders so that they only pay Capital Gains Tax at a rate of 20%, as opposed to higher rates of PAYE / PRSI on an income type distribution. In certain circumstances, the shareholders may be able to avail of Retirement Relief, and not pay any Capital Gains Tax.
It is important that the procedures laid down in the Companies Acts, such as convening a directors meeting to approve and swear the Declaration of Solvency, sending of notices to shareholders and the passing of the necessary resolutions at the shareholders meeting are properly followed. The forms filed at CRO are very carefully reviewed, and if they do not comply with the Companies Acts, there is a risk that the only solution would be a costly application to the High Court to remedy the defects.
Particular care needs to be taken if the Declaration of Solvency is sworn outside the State. Other countries have different notarising procedures, and Ireland has treaties dealing with specific countries.
A key document in placing a company into a Members’ Voluntary Liquidation is the Declaration of Solvency, in which the directors swear that all liabilities will be paid in full within 12 months. It is vital that directors make adequate enquiry of the company's affairs to ensure that this will be the case. We have had cases where personal injury claims and other claims have been made, and which were not allowed for in the Declaration of Solvency. If such claims exist, they should be settled prior to the company being placed into Liquidation. If the claims are not settled in the pre-liquidation period, there is a risk that a claimant could exaggerate his claim, and delay the completion of the liquidation.
If unknown liabilities emerge which make the company insolvent, then the company has to be placed into a Creditors’ Voluntary Liquidation. Such an event will trigger the duly appointed liquidator submitting a report on the Directors' conduct to the Office of the Director of Corporate Enforcement, with a risk that the liquidator may be obliged to take a Section 150 Restriction Application to the High Court!
A popular way for dealing with freehold property held by a company is to do a distribution in specie to shareholders. Such a distribution avoids stamp duty. It is important that if a distribution in specie is envisaged, that the resolution appointing the Liquidator provides him with specific authorisation to do such a distribution.
The Liquidator should obtain an independent valuation of the property to ensure that the property is transferred at market value. He also needs to consider whether VAT should be charged on the transfer. The transfer of the property may trigger a Capital Gains Tax liability.
The Liquidator should ensure that he has sufficient funds to discharge all other creditors of the company, after making the distribution in specie. If this is not the case, then it may be necessary for the shareholders to subscribe for additional shares.
There is a drawback to doing a distribution in specie if the freehold property has a large mortgage attached to it. To avail of the stamp duty exemption, the property must be transferred without the mortgage. This means that the mortgage would have to be paid off in full, possibly by the shareholders subscribing for additional shares. This may necessitate the shareholders having to borrow money to subscribe for additional shares. The Tax difficulty arising in this scenario is that the shareholders will be unable to offset the interest on the loan which they used to buy the shares against any rental income against the property.
There are Tax Anti-Avoidance provisions which prevent, say, a trading company retaining profits for 3 years, and then being liquidated as a Members Voluntary Liquidation, only for the business to be transferred to another trading company, and the cycle to be repeated 3 years later. Distributions received from such companies may be deemed to be income.