Making the choice to close a business is never a simple or easy process, but that process is made much, much harder if you do not know what is coming your way. There is more than one way to close a limited company as it depends on whether the company can settle its debts within a reasonable timeframe. If the company can repay its creditors, there are two options: company dissolution or solvent liquidation.
However, if a company is not able to repay its debts and/or has liabilities that are greater than assets, this is known as an insolvent company. These companies must close either by a compulsory or voluntary liquidation. Liquidation is the selling of the company’s assets so that the proceeds can be used either to repay creditors or shared among shareholders.
This guide aims to outline the options available when closing a limited company.
Closing an insolvent limited company
Creditors’ Voluntary Liquidation (CVL)
An insolvent company is an option for companies that are in a lot of debt, which they will struggle to repay. They may also be concerned that creditors may sue them if they do not declare insolvency. Companies that are insolvent but do not prioritize repaying their creditors could find themselves under scrutiny from the Insolvency Service. A CVL can not only prevent these issues but can also enable directors to claim redundancy. A redundancy pay-out could go towards repaying some creditors or paying other professionals involved in the insolvency process.
If you think that your company is insolvent, you need to stop trading immediately so you can protect your creditors. Your shareholders need to vote in favor of a winding-up resolution (with at least 75% in favor).
The next stage is to put together a repayment proposal outlining how you intend to repay creditors. If the creditors vote to accept it, they can appoint an insolvency practitioner. The practitioner will take control of the sale of the company’s assets so that the proceeds can be used to pay creditors.
It is always best to seek professional advice when it comes to business finances and legalities to ensure you acting lawfully and in the best interests of your shareholders, creditors, and employees. If you would like further information about a Creditors’ Voluntary Liquidation, visit https://antonybatty.com/company-liquidation/creditors-voluntary-liquidation.
The other form of company liquidation is compulsory, i.e., enforced closure. Compulsory liquidation can be initiated by the company, a director, or by creditors. A creditor can petition the court for a company’s winding up if they are owed £750 or more. A winding-up petition needs to be submitted to the court to kick the process off. In some cases, directors of the company may be investigated to ensure that there was no fraudulent activity or misconduct, which led to insolvency.
Closing a limited solvent company
Members’ Voluntary Liquidation (MVL)
Members’ Voluntary Liquidation is an option when a company has naturally come to the end of its life, or when the owner or director of the business wishes to move on or retire, and there is no one else to continue running the business.
To start the MVL process, a Declaration of Solvency needs to be signed. This confirms that the company is financially solvent before it closes. When this has been done, the shareholders need to vote and pass the resolution, assuming at least 75% are in support of it.
At this point, a licensed insolvency practitioner (IP) needs to be appointed to manage the process. This could include the sale of company assets, paying creditors, and distributing any remaining funds amongst shareholders.
Another option is to dissolve a company, but it must be a solvent company. It is a lower-cost option involving removing the company from the Companies House register. Before applying for company dissolution, several steps need to be taken.
The company needs to cease trading 3 months before it is removed from Companies House, close the payroll, repay all creditors and ensure all statutory liabilities have been met, such as National Insurance and tax.
The creditors also need to be informed that the company will be dissolving. This is an important step, as if not done correctly, a creditor could apply to have the company reinstated at a later date.
When these steps have been taken, a DS01 form needs to be sent to Companies House with an £8 fee. This can be done by post or online.
A notice should be placed in your local newspaper announcing that the company will be closing, with a formal confirmation of the closure three months after that.