Members' Voluntary Liquidation: Understanding a signed indemnity

What is a signed indemnity in an MVL?

As a formal liquidation procedure, a Members’ Voluntary Liquidation (MVL) takes time to be completed. In the majority of cases, MVLs tend to be finalised within 3-6 months of the liquidator being appointed; however, in more complex cases it can take over a year before the company is officially dissolved at Companies House.

The problem with this is that once a director has made the decision to liquidate their solvent company, they are often understandably keen to receive the retained profits within the business as soon as possible rather than having to wait several months to enjoy the fruits of their labour. This is where a signed indemnity comes into play.

What does a signed indemnity do?

In its simplest terms, a signed indemnity allows for an early distribution of capital to be made to shareholders prior to the MVL being officially completed and the company struck off the Companies House register.

Once we are sure there are no outstanding liabilities, the signing of a deed of indemnity will allow us as liquidators, to distribute the company’s assets to shareholders. This will comprise a large percentage of the company’s assets, minus a small amount which will be held back to cover the liquidation fees and associated disbursements, along with a slight buffer amount.

What are the consequences of signing an indemnity?

The signed indemnity will only be actioned should a valid creditor claim be received after company funds have already been distributed to shareholders. In an ideal world this should not happen; directors must sign a declaration of solvency and provide details of all outstanding creditors before commencing the MVL. The liquidator would then ensure these creditors were paid out of company funds prior to the shareholders.

However, in instances where previously unknown creditors do come forward, the deed of indemnity provides a level of financial protection to the liquidator. By signing a deed of indemnity, the shareholders are agreeing to pay back funds should a creditor later come forward with a valid claim. This means action can be taken to recover this amount in full from the shareholders in order for it to be correctly assigned to creditor claims.

Professional advice is paramount

This illustrates why taking sound advice from your accountant as well as a licensed insolvency practitioner prior to beginning the MVL process is vital. It is imperative that you are absolutely sure your company is solvent and able to settle its liabilities within 12 months of entering liquidation. Failure to do this can have severe consequences.

Falsely signing a declaration of solvency is a criminal offence; while signing an indemnity could have serious ramifications on your personal financial position should a large creditor claim subsequently come to light. By working alongside trusted professionals you can make sure an MVL is appropriate for your company and its financial situation.

If you are considering an MVL, contact the experts at Real Business Rescue. You can arrange a consultation with a licensed insolvency practitioner at any one of our 60+ offices. This meeting will help you understand your current position and whether an MVL is right for you and your company.