Updated: 5th February 2020
If you are the director of a company you no longer want there are several options you could consider to bring it to an end. The main factor to consider before closing down a company is whether or not it is solvent, as this affects the potential routes which can be taken.
Determining a company’s solvency is typically done by judging its finances against two main tests - a balance sheet test and a cash flow test. A company is acknowledged to be solvent if its assets outweigh its liabilities and the company is able to pay its debts as and when they fall due. An insolvent company on the other hand, will likely experience issues when it comes to meeting its day-to-day running costs with debts being in excess of the cash, property, and other assets the company holds.
There are two ways in which a solvent company can be closed:
1. Apply to be struck off the register at Companies House
If a business is no longer wanted and it is certain that it will not be needed in the future, one closure process involves voluntarily applying to be struck off the Companies House register. This is also known as dissolving a company.
This is often the most cost-effective and time-efficient way of closing down an unwanted solvent business. The reasons behind a company applying for strike off vary – it may be that the director is retiring and there is nobody to succeed them, or simply that they are resigning to follow a different path in paid employment or a new business venture.
A company has to have ceased trading for a minimum of three months before it can start the strike off closure procedure, and it must not have changed its name during that time. After deciding on a closure date directors need to make sure that creditors have been paid, and that all the necessary day-to-day transactions are complete.
Once the date of closure arrives, it is not possible to carry out any further transactions apart from those in connection with the closure of the company.
Here is a summary of the necessary actions prior to closure date:
Once notification has been received of the amount of Corporation Tax due, it is advisable to pay this as soon as possible because closure cannot be effected if there are any outstanding liabilities.
Monies remaining in the company bank account after all obligations have been met are usually divided between shareholders, as are any other assets of the business. It is important not to leave credit balances in the company bank accounts as they will become bona vacantia and revert to the Crown from the date of closure if not claimed and distributed before the company is dissolved.
After a period of three months from closure, assuming that all tax and other liabilities have been met, an application can be made to Companies House to have the company dissolved and removed from (or struck off) its register, using form DS01 (a fee of £10 currently applies), and a copy should be sent within seven days to all shareholders, employees, creditors and anyone else associated with the company.
Companies House then publicly advertises the company’s closure to ensure there are no objections from third parties, or indeed that the directors have not changed their mind in the intervening period. If no objections are made, it generally takes another three months before the company is actually struck off, when another advertisement is placed in the Gazette, publicly informing everyone that the company is now dissolved.
2. Members’ Voluntary Liquidation
A Members’ Voluntary Liquidation (MVL) is a formal insolvency process which brings about the end of a solvent company and is an alternative to the dissolution process described above. Although MVLs do come with a greater financial cost than a simple strike off, if your company has assets in excess of £25,000 to distribute, this is often the advised route to take. This is because closing your company through an MVL is much more tax-effective when large sums of money are involved.
Cash extracted from a company through an MVL is treated as capital rather than income; this means Capital Gains Tax (CGT) is levied rather than income tax. In addition, directors may be able to further reduce their tax liability should they qualify for Entrepreneurs’ Relief. This relief would allow money to be taken with a reduced CGT rate of just 10%.
In order to begin the MVL process, a majority of the directors must complete a Declaration of Solvency attesting for the company’s solvent nature. A shareholders’ general meeting is arranged for a minimum of five weeks later, during which a resolution to wind up the company is passed.
A liquidator is also appointed to realise all assets and distribute the proceeds to creditors. Additionally, the resolution must be advertised in the Gazette within 14 days of the meeting. Once a liquidator takes charge of proceedings, the directors have no further power to influence company business.
Another option to consider is keeping the company dormant. This is a particularly useful strategy if the company may be needed again in the future.
Being dormant means that the company remains on the register at Companies House, is unused for the time being but can be resurrected at a future point if the directors want to trade under the company name again. The annual costs of maintaining a dormant company are generally low - less than the cost of closing the company and then opening a new one later on.
Dormant companies are still required to submit a Confirmation Statement (previously known as an annual return) to Companies House, as well as annual accounts and a Corporation Tax Return, even though there would be nothing to show.
An important point to remember is that should a transaction pass through the bank account of a dormant company – even something as innocuous as a small bank charge or interest – the company will be required to complete a full set of statutory accounts for the year in question.
Creditors’ Voluntary Liquidation
A Creditors’ Voluntary Liquidation (CVL) is an appropriate process in the case where company directors want to close the company but are unable to pay all creditors in full. Shareholders must agree to a winding up resolution by a majority of 75% (by value of shares). The resolution should be sent to Companies House within 15 days, and subsequently advertised in the Gazette.
A liquidator is approached to discuss all available options, and after trading has stopped a creditors’ meeting is held, usually three to four weeks after ceasing trading. Following a detailed review of company finances, a Statement of Affairs is presented at the meeting, after which the liquidator begins to recoup monies by selling company assets.
If you are looking to close your limited company, regardless of its financial position Real Business Rescue can help. Our extensive office network comprises 78 offices across the UK with a partner-led service offering immediate director advice and support. Call today to arrange a completely free no-obligation consultation.