Updated: 8th November 2020
The way in which a limited company can be closed depends on whether it is able to repay its debts in a reasonable timeframe. If so, you will be able to close it using one of two methods – solvent liquidation, or company dissolution.
Companies that are unable to pay their debts as they fall due, or that have liabilities greater than their assets, are insolvent. They must either be closed using a voluntary liquidation process, or compulsory liquidation.
Liquidation means that company assets are sold off – if the company is solvent, the proceeds are distributed among the shareholders; if insolvent, the funds are used to repay creditors as far as possible.
Members’ Voluntary Liquidations are often used when directors wish to retire, and there is nobody else to carry on running the business, or when a company has reached the end of its useful life.
The starting point for a Members’ Voluntary Liquidation is to sign a Declaration of Solvency, which confirms the solvent financial status of your company prior to closure. After this you need to call a meeting of shareholders to vote on the MVL, and pass a special resolution if 75% of members are in favour.
A licensed insolvency practitioner (IP) is then appointed to administer the process - sell company assets, pay creditors as necessary, and distribute the remaining funds equitably amongst members.
This is the cheapest way in which to close down a limited company, but it must be stressed that the company has to be solvent. The process involves striking the company off the register at Companies House, and directors must follow a pre-defined number of steps prior to applying for dissolution.
The actions you need to take when dissolving your company include ceasing trade three months prior to striking off, closing down your payroll scheme, paying all creditors, and meeting your statutory liabilities as far as tax and National Insurance are concerned.
One of the main aspects of this process is informing creditors that the company will be dissolved. If this is not carried out correctly, a creditor may apply to have the company reinstated at a future point.
Once all the necessary steps have been taken, you send a Form DS01 to Companies House, along with the fee of £8. Alternatively this can be done online through the Companies House website. A notice is then placed in your local Gazette to alert creditors to the fact that the company is closing. Formal closure of the company is then announced via another Gazette notice three months later.
A Creditors’ Voluntary Liquidation may be appropriate if your company is struggling with debt, and you fear that creditors may take legal action against you. If your company is insolvent, and you don’t place creditors’ interests first, there is an increased danger of investigation by the Insolvency Service for misconduct or wrongful trading.
Entering a CVL can protect you from allegations of this nature, but there is another significant advantage in that you may be able to claim redundancy as a director. The average payout for director redundancy is £9,000, so this money could help to repay some of your creditors, or at least contribute to the professional fees needed.
As soon as you believe the company is insolvent, you must cease trading to protect the interests of your creditors. Shareholders vote on whether to pass a winding-up resolution, and 75% (by value) must be in favour.
A repayment proposal is then placed before creditors, who vote on whether to accept it, and appoint their own insolvency practitioner if they choose. The appointed liquidator takes control of all the company’s assets, which are sold to repay creditors.
Directors may face investigation by the liquidator, to establish the circumstances leading up to the company’s insolvency.
Compulsory liquidation is the enforced closure of your company. It can be instigated by you as a director, the company itself, or by one or more creditors.
Once a winding-up petition has been lodged at court, the process can happen very quickly. As a director, you face investigation by the liquidator for misconduct, or unlawful/fraudulent trading during the time leading up to insolvency.
When one of your creditors is owed £750 or more, they may be entitled to petition for your company’s winding-up. If a winding-up order is subsequently granted by the courts, compulsory liquidation will follow.
Real Business Rescue can provide more detailed advice on these potentially complex closure processes. We will guide you through your options, and ensure that you close the company in the most appropriate way bearing in mind its financial position and any tax implications for you as a director. We have an extensive network of 86 offices offering confidential director support across the UK.
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