How to extract value at the end of an investment vehicles life?

Henry Page

Louise Byrne

By Henry Page and Louis Byrne at Mercer & Hole

Investment or Special Purpose Vehicles are set up to deliver a specific project, be that an investment, joint venture or other opportunity that the investor (hedge fund, P/E, or family office) has identified. By its very nature the vehicle will have a limited time horizon and when the project has completed, or investment matured, unless there has been a sale of shares, the investor will be holding shares in an essentially dormant company.

The company may literally be dormant or otherwise hold mature assets, such as a property, shares, or cash which need to be extracted from the corporate shell.

It can often be beneficial to close the business and extract the assets for the benefit of the shareholders by way of a Members’ Voluntary Liquidation (MVL). An MVL is tax efficient, in that in most cases distributions will be at capital rates of tax rather than being taxed as income. In addition, where the criteria are met, Business Asset Disposal Relief, can apply for individual investors further reducing the tax burden on exit.

So what is an MVL?

An MVL is a statutory process to end the company’s life where, for example, an SPV has fulfilled its purpose or the business has ceased to trade. A licensed Insolvency Practitioner is appointed to deal with the remaining assets and liabilities, with any residual balance being distributed to shareholders following clearance form HMRC.

The directors are required to swear a Declaration of Solvency that the company can pay its debts together with interest within 12 months of being wound up. A statutory process is implemented to deal with creditor claims.

Once all tax returns have been filed to HMRC’s satisfaction, known creditors settled, and cash/assets distributed to beneficiaries, the liquidator will provide a final account to conclude the liquidation and the company will be dissolved.

What are the benefits?

An MVL can be used to simplify complex and unnecessary structures. Cost saves are made on ongoing professional fees and it removes ongoing Companies House filing requirements. It also provides greater certainty to the directors and shareholders as opposed to a voluntary strike off

Importantly, the Liquidator has the power to distribute assets that are in a form other than cash to the shareholders in specie.

An MVL is a tax efficient method of distributing a company’s assets. Distributions will be treated as capital as opposed to income. This could be particularly helpful in family office businesses. In some cases, shareholders could qualify for Business Asset Disposal Relief (formally Entrepreneurs Relief), which can reduce the tax rate down to 10%. With planning, distributions can be made early in the liquidation or timed to span two tax years.

How to Prepare for Liquidation

First, speak to your advisors, whether that’s your accountant or solicitor, as they will be able to point you in the right direction of a recommended liquidator. Consider then what you want to achieve from the exit. The distribution of non-cash assets such as property is possible and so it may not be necessary to liquidate all non-cash assets.

It is likely that there will need to be some degree of tidying up. Depending on the beneficiary’s preference it can often be advisable to ‘clean up’ the balance sheet prior to liquidation by:

• Liquidating non-cash assets which you don’t intend to be distributed in specie, such as the debtor book; and
• Settling as many creditors as possible.

While a liquidator will be able to deal with assets and liabilities during the liquidation, a “cleaner” balance sheet will reduce the professional costs associated with the liquidation, as well as reducing statutory interest (8%) on creditors’ claims.

Next, think tax! Post liquidation distributions can attract a Capital Gain for the beneficiary. In corporate group structures it may be beneficial from a tax perspective to declare distributions of remaining cash prior to liquidation.

Ensure contractual obligations are terminated or novated, for example premises leases, hire purchase contracts and employment contracts. Consider also shutting down the Company’s PAYE scheme and deregistering for VAT.

It will, however, be necessary to retain the company’s existing accountants to file the final Corporation Tax returns up to liquidation.

Consider then whether the company retains any Intellectual Property which is of value, and shut down dormant bank accounts.

Using the solvent liquidation process will allow investors to conclude an investment vehicles life in a tax efficient, professional manner. Returning value to investors and ensuring an independent process to settle creditor claims, providing comfort to directors. As with any transaction planning and tax are essential components to ensuring the beneficiary’s goals can be delivered and so it is important to hold initial conversations at the outset of the process.

Henry Page is a Partner and Louis Byrne a Manager in the Corporate Restructuring team at accountants Mercer & Hole. Visit www.mercerhole.co.uk.