Understanding the process of closing a company with financial problems

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 has entered insolvency, however, or you believe it is likely to become insolvent, other procedures may be more suitable. 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 to prevent the possibility of personal liability for yourself and other directors.

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 many 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.

If your application is accepted, a notice will be placed in the Gazette that alerts creditors to the fact that you are closing the company. This is followed by another advert three months later, announcing its dissolution.

Compulsory liquidation

If your business is struggling to survive and has few assets to sell, the directors might choose to send the company into compulsory liquidation. This procedure generally involves the assistance of a solicitor, and takes around two or three months to complete.

One of the downsides of taking this action is that directors will be investigated by the liquidator for instances of misconduct or unlawful trading. They will scrutinise the company’s financial affairs for various types of transaction that might have caused your financial issue, including:

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

If you are considering whether or not to place the company into compulsory liquidation because of financial problems, you may want to consider another alternative – a Creditors’ Voluntary Liquidation.

What is a Creditors’ Voluntary Liquidation?

Creditors’ Voluntary Liquidation offers a little more protection for you as a director in terms of the liquidator’s investigation process. By instigating the CVL you are placing your creditors’ interests first, above those of the company and its shareholders.

There is a legal requirement to cease trading when your company becomes insolvent, so if you have high levels of debt which are unlikely to be repaid, or the company’s liabilities are greater than its assets, this may be the best option.

Although you will still be investigated by the liquidator, the fact that you have taken positive action to minimise creditor losses could help you avoid further investigations by the Insolvency Service.

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 takes over 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 and sold at auction in order to repay creditors. 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, and to avoid later allegations of wrongful trading, is to cease trade immediately you suspect that the company cannot pay its bills.

Begbies Traynor specialises 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.