Understanding the process of closing a company with financial problems

Updated: 5th April 2021

There are various ways to close down a limited company, from striking it off the register at Companies House to compulsory liquidation instigated by its directors. The most appropriate route for your business will depend on the seriousness of any financial issues you are experiencing, and the level of debt involved.

Striking off your company is one of the options that might be open. It is a cost-effective and straightforward method of business closure, and one that is often used by directors wishing to retire.

Are you eligible to use voluntary strike off to close down your company?

In order to be eligible for voluntary strike off, the business must not be under threat of liquidation from creditors, or party to any formal insolvency agreement such as a Company Voluntary Arrangement (CVA).

If the company is insolvent, however, or you believe it is likely to become insolvent, you will need to look at more formal ways of closing your company. These include two liquidation processes - compulsory liquidation and a Creditors’ Voluntary Liquidation (CVL) procedure.

Begbies Traynor is the UK’s leading corporate rescue and recovery practice.  We can work with you to establish your company’s financial position, helping you make the best decision for your company and its creditors.

What does striking off a company involve?

There are certain steps that you must take prior to striking off your company from the register at Companies House. These include ceasing trading for three months beforehand, ensuring all your liabilities are met, and completing various other administrative tasks including the closure of your payroll scheme.

Once the necessary actions have been taken and all company assets have been apportioned among shareholders, you can apply for strike off using form DS01 which should be sent to Companies House along with the payment of £10.

A notice will then be placed in the Gazette that alerts creditors to the fact that you are closing the company. So long as no objections are received, this is followed by another advert three months later, announcing its dissolution.

Compulsory liquidation

If your business is struggling to survive and is experiencing severe financial pressures, it may be subjected to compulsory liquidation. This is a process which is initiated by one or more of the company's creditors who take the step of petitioning the court for your company to be liquidated. 

As with any liquidation process, the appointed liquidator will scrutinise the company’s financial affairs for various types of transaction that might have caused your company to become insolvent, including:

  • Transactions at an undervalue
  • Preferential payments
  • Misfeance (this is deliberate but not unlawful wrongdoing by a director)

If you are concerned that creditors may force your company into compulsory liquidation, you may want to consider an alternative procedure which would allow you to voluntarily place your company into liquidation. This is done through a formal process known as a Creditors’ Voluntary Liquidation (CVL).

What is a Creditors’ Voluntary Liquidation?

Creditors’ Voluntary Liquidation is a process which is initiated by the directors or shareholders of an insolvent company when the possibility of financial recovery is unlikely. This is by far the most common form of corporate liquidation. 

There is a legal requirement to place the interests of your creditors first when your company becomes insolvent. By instigating the liquidation process yourself, you are demonstrating your desire to adhere to these obligations and place your creditors’ interests above those of the company and its shareholders.

If you have high levels of debt which are unlikely to be repaid, or the company’s liabilities are greater than its assets, a CVL may be the best option.

What happens during a Creditors’ Voluntary Liquidation process?

Company shareholders vote on a resolution to enter a CVL with a view to winding up the company.  If a majority of 75% (by shareholding) vote in favour, a liquidator is appointed who will then assume control over the company.

An advert is placed in the Gazette, and a meeting of creditors takes place during which the liquidator presents a Statement of Affairs explaining how the company has reached this financial position.

Company assets are professionally valued before being liquidated in order to repay as many creditors as possible. Once all assets have been realised and the liquidator’s duties are complete, the company will be removed from the Register of Companies and cease to exist.

The most suitable method of closure for your business will depend on the seriousness of your financial problems. The main consideration when it comes to insolvency is to seek professional advice immediately once you suspect that the company cannot pay its bills.

Begbies Traynor specialise in business rescue and recovery, and can offer valuable professional insight into the issues you are experiencing. There may be solutions to your financial problems that do not involve closing the company - call one of our licensed insolvency practitioners for a same-day meeting in complete confidence.

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