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How do you wind up a limited company with or without debts?

If you are thinking of closing down your company, whether it is solvent or insolvent, the process begins with a resolution to ‘wind up’ the business. Depending on your circumstances, this is made by shareholders and/or creditors of the company.

A ‘winding up resolution’ leads to the liquidation of company assets by a licensed Insolvency Practitioner, with the intention of either repaying creditors or distributing the money realised to shareholders.

Directors can voluntarily wind up their company with debts. This often happens if they fear allegations of wrongful trading or improper conduct as a director. Creditors can also take the initiative if they are owed a minimum debt of £751, by petitioning the court for a compulsory winding up order.

Assuming that the company has no debts or is able to repay them in full before closure, the process followed is called a Members’ Voluntary Liquidation, or MVL. This is often used by sole directors wishing to retire, or by a group of companies that want to close down a defunct subsidiary.

Members’ Voluntary Liquidation

The MVL process

  • Engage the services of a professional Insolvency Practitioner to advise and oversee the process
  • Convene a board meeting to discuss voluntary liquidation as an option
  • The majority of directors sign a Declaration of Solvency – this is confirmation that the company can repay all its debts within 12 months of the liquidation date
  • A Liquidator is appointed at an Extraordinary General Meeting with shareholders, at which a resolution is passed to wind up the company if 75% of shareholders (by value) are in agreement
  • The Liquidator sells company assets, pays all creditors in full and distributes any remaining capital amongst shareholders

Creditors' Voluntary Liquidation (CVL)

The Creditors’ Voluntary Liquidation process also involves voting a resolution to wind up the company. In this instance, however, the reason is to avoid further debts and minimise the risk of personal liability for directors.

Trading insolvently carries with it a risk of disqualification as a director, financial penalties, and a prison sentence in the more serious cases. It is important therefore, to recognise when there is no hope of business recovery, and to put creditor interests above those of the shareholders.

The CVL process is as follows:

  • A meeting of shareholders is called, during which 75% (by value) need to agree to pass a winding up resolution
  • A licensed Insolvency Practitioner is officially appointed to liquidate the company
  • The winding up resolution is sent to Companies House, and also advertised in the Gazette
  • A creditors’ meeting is held within 14 days of the resolution, and the meeting must also be advertised in the Gazette
  • A Statement of Affairs is presented at the creditors’ meeting, detailing the company’s financial position. This is then sent to Companies House.

Under the liquidation process, creditor interests take precedence over those of directors, shareholders and members. Directors must act with integrity to avoid accusations of improper conduct, and are obliged to provide the IP with all the information needed to carry out this process.

Compulsory Liquidation

Compulsory Liquidation follows when action by creditors forces a company to close down. Any creditor can apply to the court for a winding up order if they have sent a 21-day Statutory Demand for a debt of more than £750 which remains unpaid.

Once passed by the court, a winding up order seals the fate of a company delinquent on payments to secured or unsecured creditors.

Compulsory Liquidation process

  • A Statutory Demand is sent to your company for payment within 21 days
  • If this remains unpaid, the creditor can petition the court for a winding up order
  • You have seven days in which to take action to prevent the liquidation of your company
  • Once the winding up petition is advertised in the Gazette, your company bank accounts will be frozen
  • The ensuing winding up order essentially means the end of your business
  • Company assets are liquidated to repay creditors

There are several issues that directors need to take into account when their company is liquidated in this way:

  • Loss of control – the IP takes complete control over the company, and your duties as a director cease.
  • Personal liability for company debts – personal liability may be increased if directors are found to have acted improperly, or if personal guarantees have been provided for business borrowing.
  • Obligation to assist the Liquidator – this includes providing information when requested, including accounts, insurance documents, asset registers and payroll details. You will also need to be interviewed by the Insolvency Practitioner.

The Liquidator is obliged to interview directors following a Compulsory Liquidation. A report is sent to the Secretary of State detailing any concerns regarding their conduct leading up to insolvency.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland