Possible Alternative Approaches to an MVL - A case study - The dangers inherent in the Extra Statutory Tax Concession

ESC C16 - And Section 1003 of The Companies Act 2006 - And the Difference between Insolvency & Tax law on Distributions

This page considers how you can get money out of your company with no risk of any part being later clawed back. The page also considers the advantages and disadvantages of a Members Voluntary Liquidation in comparison with the possible alternative of using the Extra Statutory Tax concession [ESC C16] to make a capital distribution. (Please read to the bottom of the page as an important component of ESC C16 was withdrawn on the 14 October 2011.)

Illustrative and fictional Case Study - Seablue (Exeter) Limited

Seablue (Exeter)  Limited which has paid up share capital of only £2 has ceased to trade. The director of the company John Jones is also the sole shareholder. To avoid the costs of a liquidator in a Members Voluntary Liquidation  (MVL) John decides to bring the life of the company to an end by following a procedure similar to that outlined below.

  • Firstly, John takes tax advice from his advisers as to his proposed course of action.
  • John sells all the assets of the company, pays all  the creditors and is left with a sum of £100,000 in the company bank account.
  • John obtains a tax clearance under the tax Extra Statutory Concession known as ESC C16 that if he returns £99,998 (less the £2 share capital) the Inspector of Taxes will treat the distribution as a capital distribution. [The importance of "capital" distributions is that they ae taxed at the lower capital gains tax rates as opposed to the higher income tax rates].
  • John pays himself the £99,998 and pays the £2 share capital to the treasury solicitor (share capital cannot be returned to shareholders without a formal liquidation)


    If the share capital in the above company had been £5,000 or more a members voluntary liquidation would have been the most cost effective route to follow. The reason for this is that if the liquidation route is not followed the amount of the share capital itself cannot be returned to the shareholders. It has to be paid to the treasury.

    In appropriate cases there is a further alternative of avoiding this loss of share capital. That relates to using the "reduction of capital" provisions in the "Companies Act". This process is now relatively easy following the relaxed requirements for "reduction of capital" introduced by The Companies Act 2006.

    The Danger

    There is a material danger in following the above illustrative route which involves the later striking off the company from the register at Companies House under Section 1003 of The Companes Act 2006. That danger is caused by the fact that as no MVL took place the company could be reinstated to the register then wound up by a creditor.

    Purnells acted for a company where the director wanted to apply for strike off and return to shareholders £2 million pound. Purnells advised the directors not to do that but instead place the company into members voluntary liquidation. That was just as well as after Purnells had distributed the £2 million to the shareholder a contingent creditor raised his ugly head. That creditor had an asbrestos claim for over £1million. If the company had not been placed into a MVL the shareholder would have been £1 million worse off.

    There are other more practical options & alternatives on the "What is a Members Voluntary Liquidation" page on this website.

    Law change on 14 October 2011 - Withdrawal of part of the concession in ESC C16

    In 2010 HMRC proposed replacing ESC C16 with new law to be set out in a future Finance Act. 

    Part of the concession in  ESC C16 was finally withdrawn, by announcement from the Treasury Solicitor, on the 14 October 2011. There are two main points to note:

    1. ESC C16 is still available (post 14 October 2011) in part.  You may continue as before to obtain a clearance from HMRC that "distributable reserves" may be distributed as if they were "capital" (and the recipient then benefits by the receipt being charged to capital gains tax rather than income tax). This is the same as pre 14 Octoner 2011.

    2. Post 14 October 2011 however share capital of any amount cannot be informally distributed under ESC C16. (Previously there was a £4,000 concessionary limit). To do so would make the transaction illegal and the money involved would be classifed as "bona vacantia" and be payable to the Treasury Solicitor. The logic behind this is that subsequent to the enactment of the Companies ACt 2006 it is now much more easy to "reduce" share capital. Therefore in any solvent informal winding up the capital should be "reduced in accord with the Companies Act before obtaining clearance rom HMRC to distribute the then enhanced distributal reserves as if they were capital.


    To establish the most cost effective & risk free route for getting more money out of your company you can obtain free advice to understand the options of Members Voluntary Liquidation or Capital Distributions made under an Extra Statutory Tax Concession or through a Demerger or Return of Capital.

    Purnells have developed a Guide to Members Voluntary Liquidation, and should hopefully assist your understanding.

    Would you like us to give you a call?

    Fill in the form and we'll give you a call as soon as we can to discuss your needs in a free initial consultation with a Licensed Insolvency Practitioner. Alternatively give us a call on 01326 340579 if there is an urgency to your needs.

    The information provided will be used solely to contact you and any information you provide will be held in accordance with our firm's privacy policy, and not used for marketing purposes.