What Is A Distribution In Specie In An MVL?

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Members Voluntary Liquidation (MVL) is a process often utilised by solvent companies when directors want to retire or believe the company has reached the end of its useful life. This method of liquidation allows directors to wind up their affairs and distribute assets to shareholders in an orderly and efficient manner. Assets are typically sold and distributed as cash, but this is not the only way that assets may be distributed during an MVL. Distribution in specie may also be used. 

What Is A Distribution In Specie?

Distribution in specie refers to the distribution of assets in their actual form, rather than converting them to cash before distribution. In an MVL, this essential means that some or all of the company assets are directly transferred to shareholders in their current form. 

When Is Distribution In Specie Used?

Distribution in specie can occur with both physical assets such as land, cars, stock and machinery, as well as financial assets like bonds and shares. 

This method of asset distribution is also commonly used for overdrawn director’s loan accounts. When a director owes the company, they may wish to settle the loan by transferring specific assets to the director rather than selling assets to generate the cash required. This approach can have tax advantages, but it is important to note that HMRC can class a loan account as income and therefore the overdrawn account may need to be repaid with cash before liquidation. You should always seek business liquidation advice if you are considering distribution in specie as a way of clearing an overdrawn director’s loan account as part of an MVL.

Benefits Of Distribution In Specie

One of the primary reasons companies opt for distribution in specie during an MVL is the possible tax advantages. When assets are distributed in their actual form they are classed as capital rather than income and will therefore be subject to lower tax rates. You can read more about the wider tax implications of an MVL here.

Distribution in specie can also be a valuable tool if there are plans to start a new company when the existing one is closed. In these circumstances, it can make sense to hang onto assets rather than convert them to cash as they can then be used when the new company is underway. For example, directors may wish to hang onto business premises rather than start somewhere completely fresh. Shareholders may also wish to receive physical assets rather than cash due to sentimental value.

Limitations Of Distribution In Specie

While distribution in specie offers a number of clear advantages, this method of asset distribution can have some limitations. One of the main challenges that may arise is the valuation of assets and, more specifically, ensuring that this is fair and legal. Companies may face claims of unlawful asset distribution if shareholders receive assets of a higher value than they should.

Shareholders must also express their consent to the distribution in specie. This ensures that they have a clear understanding of the assets being distributed, their value, and the tax implications that receiving them may cause.

These benefits and limitations can have different implications for different companies, so it’s important that you seek professional advice to understand the intricacies of an MVL. With years of experience helping solvent companies through the liquidation process, the team of licensed insolvency practitioners at My Liquidation can help. Simply get in touch today to begin the process of a smooth and successful MVL.

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