There are two ways of deliberately winding up operations and liquidating business assets. The first is referred to as a Creditors Voluntary Liquidation (CVL) while the latter is called a Members Voluntary Liquidation (MVL). In this article we’ll discuss about the latter, what instances call for it and when taking it is not allowed.
As mentioned earlier, an MVL is a voluntary move done by an entity who wishes to cease trading and redistribute its assets to stakeholders. It is passed by the owners, members or directors themselves for reasons that include the following:
- Wish for Retirement – When a majority decision has been decided by the board or the owners, they can opt to close the business for purposes of their retirement.
- Lack of Successor – A lack of heir or successor for an entity can also cause it to undergo an MVL for purposes of redistribution.
- Accomplishment of Purpose – Once the organization has fulfilled all its objectives and its presence is not anymore deemed profitable and viable after such completion, it will also be wound up before losses come up.
- Loss of Vital Member – The retirement, resignation or death of a very important member of the organization whose presence greatly impacts operations and profitability can be detrimental. As a measure to prevent terrible consequences, the company may prefer to wind up. This of course involves careful analysis and examination of the situation.
- Precautionary Measure – Should impending circumstances bring about consequences that could prove to create a large amount of losses to the entity, an MVL may be taken in order to avoid it and cease when profits and assets are still available for distribution.
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A Members Voluntary Liquidation will call for an appointment of a liquidator to oversee the process of winding up which includes the sale of all assets and the distribution to creditors and shareholders. Unlike a CVL, this procedure ensures fulfillment of all obligations to creditors before any is given to owners and shareholders.
It is therefore forbidden for an insolvent company or one that is drowning in debt to apply for a Members Voluntary Liquidation. As a requirement, the entity must first declare and prove its capacity to fulfill its maturing obligations within a span of twelve months otherwise the procedure will be turned into a CVL. It should not be in any way used as a means to escape obligations.