Deciding to close a company is no small decision for any director. Doing so involves a lot more considerations and moving parts than just locking the doors and hanging up a ‘closed’ sign.
Factors such as how many creditors it has, whether the business or its assets bear any market value and, whether the decision is even in your hands, will all impact how you approach the closure process.
So, what are your options to close your company, what factors have a bearing on those options, and what happens if you do nothing?
Is The Company Solvent Or Insolvent?
The company’s solvent position has the largest bearing on how you would close your company as it dictates the process through which you’d close. A company being insolvent adds creditors to those considerations.
Your company could be insolvent if:
- It can’t afford to repay its liabilities when they fall due.
- The company’s liabilities outweigh its assets, including cash in its bank account.
- Creditors are pressuring the company for repayment and may have taken legal action to recover what your company owes.
- Insolvency recovery processes wouldn’t be feasible or have already failed to improve the company’s position.
You should always be aware of your company’s solvent position and take the steps necessary to remedy the problem as soon as you become aware of it.
While closing a company often comes with the association of insolvency, a company may need to close for unrelated reasons, such as:
- You may wish to retire from being a company director or have no interest in running your company.
- A change in the market has reduced the company’s viability.
- The company could be one of several undergoing a merger or acquisition by a larger company.
Closure Options For Solvent Companies
If your company is solvent, then depending on the value of your company’s assets and what you want for its future, one of the following options may be appropriate:
Dissolving The Company
A solvent company can be dissolved by applying to strike it off the register of companies at Companies House.
Dissolution may be an option if your company hasn’t done any of the following in the three months prior to its application:
- Has undergone legal or insolvency proceedings.
- Changed its name.
- Has a non-finalised pension scheme.
- Has traded or disposed of stock.
Creditors can restore the old company for up to six years after dissolution should they have a valid reason to do so or if any of those listed above come to light.
Closing The Company Through A Solvent Liquidation
If your company has assets exceeding £25,000, including cash in its bank account, it could undergo a Members Voluntary Liquidation (MVL).
Doing so can be more tax-efficient than a dissolution, allowing directors to claim Business Asset Disposal Relief and reducing the amount of Capital Gains Tax paid.
Closure Options For Insolvent Companies
If your company is insolvent, you should contact a licensed and regulated insolvency practitioner to discuss your company’s situation and how best to alleviate its problems.
Depending on the situation, it might be possible to help the company recover or have it continue existing in some form.
However, if recovery isn’t feasible, you should take immediate action to close your company.
Having outstanding creditors means dissolution isn’t suitable for insolvent companies, so an insolvent liquidation process would likely be the best option.
In the UK, an insolvent liquidation is called a Creditors Voluntary Liquidation (CVL), wherein the insolvent company is closed in an orderly manner, with its unsecured debts written off, and allowing you and its other directors to walk away and start afresh.
If you’ve acted in the company’s best interest leading up to and during the insolvent period, you can start a new company should you wish to.
Closure Options If You Can’t Or Don’t Want To Liquidate
If, after learning that your company is insolvent, you choose to bury your head in the sand, your creditors are likely to take action to recover what you owe them.
This could start with Statutory Demands and County Court Judgments (CCJs), but continuing to ignore these can lead to visits from debt collectors and bailiffs.
At its worst, this action can lead to creditors issuing a winding-up petition. A creditor can do this if your company owes them more than £750.
Other creditors can also ‘piggyback’ on this petition by adding their claims. If this petition isn’t challenged and a validation order granted, the petition becomes a winding-up order.
Once advertised in the London Gazette, the company’s bank accounts will freeze, making trading impossible and forcing the company into compulsory liquidation.
To Summarise
Your company’s solvent position should be your first consideration if you’re closing your company. It will have a large bearing on the closure process used.
Solvent companies can close through dissolution or a solvent Members Voluntary Liquidation depending on its volume of assets.
If your company is insolvent, you should contact a licensed insolvency practitioner. They will discuss your options, and if the best one for your situation is closure, they will help facilitate a Creditors Voluntary Liquidation, which is often preferable to having creditors force the company into compulsory liquidation via a winding-up petition.
