In a solvent liquidation, a distribution in specie refers to the direct transfer of certain company assets in their existing form, rather than converting those assets into cash prior to distribution. Distributing in specie can be a desirable option for directors, as it can give you more flexibility and input into how you and your insolvency practitioner choose to liquidate your company.
For example, when closing your company, you may not want to sell your assets externally, but instead distribute them to the existing shareholders in the business. Alternatively, the assets could also be difficult to sell, and the process may take longer – making transferring the asset in this way a faster and simpler option.
How a Distribution in Specie Benefits Creditors in the MVL Process?
A distribution in specie is often used in Members’ Voluntary Liquidation (MVL) when a business lacks cash funds but has numerous assets. It can often be deemed as a simpler, more tax-efficient way to close a business, and can be beneficial in several ways:
Simplified Liquidation: Distributing assets directly can accelerate the timeline for closing the business. It ensures that shareholders will receive their entitlements without the delays and complications that can arise from selling the assets for cash.
Shareholder Preferences: Some shareholders may prefer to receive physical assets instead of funds, especially if the assets are deemed to have long-term value.
Control: When shareholders are given assets, they have control over when and if they should sell them. This gives them a choice on whether they want to keep the asset or realise its current cash value.
Market Valuation: Selling assets to convert them into cash can sometimes pose difficulties or be financially unfavourable at the time. Therefore, giving the asset in its existing form can sometimes be more beneficial, for shareholders who can then decide on the optimum strategy for disposal.
Limitations of a Distribution in Specie
A distribution in specie can simplify the liquidation process, and help you save on transaction costs by allowing for the direct transfer of assets to creditors. However, it can also hold several issues and limitations.
Valuation Challenges: The valuation of assets can be a complex matter, particularly for taxation purposes. The process therefore needs to be undertaken in a way that minimises the impact on shareholders. It is also important to note that the tax authorities may perceive value differently, which can lead to disputes further down the line.
Administrative and Legal Complexity: To distribute some assets (i.e., property), you will need specific documentation and to manage the process carefully, as legal and regulatory requirements can add complexity.
Tax Implications: Choosing to distribute assets may trigger capital gains tax, which can complicate financial outcomes for shareholders and may make this route more complex than distributing funds.
