There are a number of routes to effectively closing down a limited company [1]GOV.UK “Closing a limited company and the right one will depend on your particular circumstances.

Closing a business is likely to be one of the most important decisions you make and while a simple dissolution may be possible, in many cases, a more complex solution will be required.

This is where expert advice from a licensed insolvency practitioner will be invaluable and here, we outline the options and correct procedures that need to be followed. 

Closing a Business when it is Insolvent

If your limited company is insolvent or close to this, then this can put directors under a huge amount of pressure. However, it is vital to seek professional advice from a licensed insolvency practitioner at an early stage. They can help assess your level of debt and the position with creditors and discuss your goals and how you want to proceed.  Even if the business is insolvent, it may still be possible to structure a rescue deal if you are confident the firm has a future.

This might involve a pre-pack administration process, where underlying assets are sold to another party or existing directors. This would only be permitted if it could be proven to offer the best solution for creditors.

However, if there is no alternative and business needs to be closed then you should opt for a Creditors’ Voluntary Liquidation (CVL). This process needs to be run by a licenced insolvency practitioner, as it is not possible for a director to liquidate a business themselves. Before you can enter into a CVL, a majority of directors need to agree to this as do 75% of shareholders – notably, only shareholders who vote count for this 75%.

There are numerous protocols to be adhered to in a CVL and the insolvency practitioner – who you are able to select – will advise on these and keep to a timetable. They will also liaise with creditors and directors and organise meetings, which can take place virtually and also ensure your accounts are properly completed along with a final statement produced for HMRC.

Other aspects will include assisting your employees, who will need to be made redundant because of the liquidation. Many directors feel loyalty to their staff and find it difficult knowing their employees will be made redundant. However, your insolvency practitioner will be able to act as your main point of contact if you wish. This can include advising on redundancy pay and other benefits they may be eligible for.

A CVL will almost certainly result in a better outcome compared to compulsory liquidation. This is where a creditor, such as HMRC, takes legal action against the business via the courts. The Official Receiver will be appointed as liquidator and the process will mean directors will not only be potentially subject to more investigation, but also have no control in proceedings.

Closing a Business when it is Solvent

If your business is solvent, a Members’ Voluntary Liquidation (MVL) is often the best way to close the business, in particular as it can mean tax savings.

Perhaps your firm was set up for a particular purpose but has run its course and is no longer relevant or you wish to retire or work on other projects?

In such cases, an MVL would be the most appropriate method, provided the firm has at least £25,000 in assets. It is essential the company is solvent and directors are required to sign a legal document, called a declaration of solvency, and produce a closing financial statement. You need to show you will be able to pay bill within a 12 month period.

A licensed insolvency practitioner is required to oversee an MVL and they will supervise the necessary processes to include ensuring all filing is up date and bills, including tax liabilities, are paid, in addition to making sure that the business is deregistered from  deregister from all the necessary authorities

An MVL can mean potential tax benefits as funds from the sale of assets can be treated as capital distribution and this means they are subject to Capital Gains Tax, which has a lower tax rate, compared to income distribution.

Directors can also benefit from Business Asset Disposal Relief, which further reduces the amount of capital gains tax paid on qualifying gains – this is set at the favourable rate of only 10%.

Your insolvency practitioner will advise on whether you are eligible for Business Asset Disposal Relief, and on how to apply for this and this includes needing to have owned your share in or held office within the company for at least two years before it ceased trading.

Closing a business through Company Dissolution

Company dissolution is the most straightforward and cost-efficient method of closing down a solvent company, but directors must follow strict guidelines prior to closure. These include paying all creditors in full, notifying HMRC, closing business bank accounts, selling or distributing any assets and submitting final accounts. A range of parties must be informed of the planned closure such as shareholders and employees and pension fund trustees. Failure to inform the correct parties could mean a fine and possible prosecution.

The company must also cease trading for three months prior to closure, and must not change its name during this time. You should complete the form DS01 and when all the necessary requirements have been met, the company will be struck off the register at Companies House, and cease to exist – [2]GOV.UK “Striking off a company from the register.

If you are not 100% certain that you want to close the business, then you may want to consider it allowing it to remain ‘dormant’. This is where you should submit dormant accounts and continue to file an HMRC tax return – the business will remain on the Companies House Register.

 

References

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

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  1. GOV.UK “Closing a limited company
  2. GOV.UK “Striking off a company from the register