When it comes to closing a limited company, there is not a one size fits all solution. Depending on the financial position of the company at the time of closure, as well as who initiates the process – this could be the directors/shareholders, or a disgruntled creditor – will determine how the business is brought to an end.
Closure Options for Insolvent Companies
If your company is insolvent – meaning it is unable to meet its outgoings as and when they fall due, or its liabilities outweigh its assets – and there is no realistic possibility of the situation improving, placing the company into an insolvent liquidation process may be the best option for all involved.
The liquidation of an insolvent company can be entered into either voluntarily by the company’s directors, or else it can be forced into liquidation by order of the courts.
- Voluntary Liquidation – As a company director, you may reach the stage where you believe your company to be insolvent and need to take steps to address the situation. If an attempt to save the business around isn’t likely to be successful, or you simply do not have the desire to attempt this, you may decide instead to voluntarily place the company into liquidation. This is done using a formal insolvency process known as a Creditors’ Voluntary Liquidation – or CVL.
A CVL can only be entered into under the guidance of a licensed insolvency practitioner who will facilitate the whole process on behalf of your company. They will be responsible for identifying and selling company assets, liaising with outstanding creditors, before bringing the company to an orderly end and formally closing the company for good.
As the director of an insolvent company, you have certain legal duties; one of these is to prioritise the interests of creditors once you know your company to be insolvent. By enlisting the help of an insolvency practitioner at this stage, you are demonstrating your desire to comply with these obligations.
- Compulsory Liquidation – In some cases, a company is forced into liquidation, most often through non-payment of money that it owes to creditors or HMRC. This is known as compulsory liquidation. When all other collection efforts have failed, creditors may petition the courts to have your company compulsorily wound up by serving a Winding Up Petition on you. This is the most serious action a creditor can take against your company and matters generally escalate to this extent over a period of time where the creditor is tired of chasing payment.
Unless you are able to successfully defend the WUP, your company will be forced into liquidation against your will. An Official Receiver will be appointed by the courts who will administer the closure of your company as well as any associated investigation into your conduct as a director.
Closure Options for Solvent Companies
It is not just insolvent companies who may be looking at closure options; indeed, there are a whole host of reasons why a solvent business may also be looking at closing its doors for good. Perhaps the owners are approaching retirement and there is no one suitable to take over the business, maybe the market is changing and the need for the company is no longer there, or in many cases the directors are simply looking to extract the proceeds from the business and move on to a new venture.
Regardless of the reasons behind the desire to close, there are two main way in which this can be achieved.
- Company Strike Off/ Dissolution – If your company is no longer required, you can apply to have the company struck off the register held at Companies House. This process is also known as dissolving a company. Company strike off is a relatively quick and cheap way of closing down a limited company without debts. Directors must complete a DS01 form and pay the appropriate fee. Any assets remaining in the company at the time the strike off is finalised will become ‘bona vacantia’ and possession of these assets (including any cash left in company bank accounts) will be transferred to the crown.
While strike off may be a straight forward process, this is rarely the most cost-effective manner of closing down a solvent company. If your business has in excess of £25,000 worth of cash or other assets to distribute, it is highly likely that opting for a formal solvent liquidation process by way of a MVL will prove to be the most appropriate way of achieving this.
- Members’ Voluntary Liquidation (MVL) – A Members’ Voluntary Liquidation is a formal process which brings a solvent company to an orderly end. One of the main benefits of using an MVL rather than opting for strike off, is that funds extracted from the business using this method are treated as capital gains rather than income, and taxed accordingly.
Many will also be able to take advantage of Business Asset Disposal Relief (BADR) – formally known as Entrepreneurs’ Relief – which reduces the payable rate of tax even further, down to just 10%. While an MVL does cost more than a strike off owing to the fact that an insolvency practitioner has to be appointed to oversee the process, the amount saved in tax often eclipses these professional fees.