If the Company is Solvent
For those Directors thinking of closing a limited company currently in a state of solvency, there are 2 options available depending on the value of company assets.
Members Voluntary Liquidation (MVL)
If a company can realise sufficient value from the sale of its assets to repay Creditors in full and leave at least £5,000 left over for distribution to Shareholders, then a Members Voluntary Liquidation is often the most tax efficient and cost effective way of closing down. A Members Voluntary Liquidation would see the company’s assets being sold or realised and the proceeds used to make full payment to all Creditors. The remaining cash would then be distributed to Shareholders and the company would be removed from the register at Companies House. A Members Voluntary Liquidation allows Shareholders to take advantage of Entrepreneurial Tax Relief, meaning that the MVL process is a tax efficient way of closing a limited company.
Find out more information on Members Voluntary Liquidations (MVL).
If the realisation of company assets will not be able to provide at least £5,000 for distribution back to Shareholders once Creditors are paid in full, then an MVL may not be the most cost effective means of closing a limited company. In these circumstances, a Dissolution or ‘Striking off’ may be more appropriate and cost effective. A Dissolution would involve the company being removed from the company register at Companies house and ceasing to exist. To place a company into a Dissolution, the following criteria must be fulfilled:
- There can be no outstanding legal action against the company, such as a winding up petition.
- The company must not have traded for 3 months.
- The company name must not have been changed in the last 3 months.
- The company cannot have any assets, this includes cash in the bank, machinery or equipment.
If this criteria is satisfied then Directors may proceed with Dissolution, which requires the filing of a DS 01 form at company’s house. It is a common misconception that a Director can’t close a company via Dissolution if it owes debts to any Creditors. However this is not the case and Directors can indeed apply to have the company dissolved. Directors are required however to inform any Creditors of the Striking off and make them aware that they have 3 months in which to contest it.
If the Company is Insolvent
Closing a company is still possible regardless of whether or not the company is solvent, however the processes available slightly differ. A company is usually deemed to be insolvent if it can no longer meet its day to day obligations, or if its liabilities outweigh its assets on the balance sheet. In this instance the following methods of closing the company are available.
Creditors Voluntary Liquidation (CVL)
A Creditors Voluntary Liquidation is a process that is implemented if the financial stability of a company has deteriorated to the point where Directors may be worried about Wrongful Trading accusations or the issue of a Winding up Petition forcing the company into Compulsory Liquidation. A Creditors Voluntary Liquidation involves closing a limited company through realisation of its assets in order to make repayments to Creditors on a pro rata basis.
Find out more information on Creditors Voluntary Liquidations (CVL).
For the Directors of a limited company which has fallen into a position of insolvency, it can be difficult to decide whether to close the company or fight to keep it trading. In this instance, placing the company into Administration provides protection from Creditors and halts all pending legal action against the company. A Licensed Insolvency Practitioner will be appointed as Administrator and collate all necessary information about the company in order to make an informed decision about the company’s future. The business may then be saved through a range of recovery options or closed through Liquidation.
Find out more information on Company Administration.
Pre Pack Administration
In some instances it is feasible for Directors to close a limited company and then resume trading with the same business assets under a different corporate identity. This is referred to as Pre Pack Administration, and is often a way to make some repayments to Creditors as well as saving a business and the livelihoods of its workers. A Pre Pack Administration works by having a pre-arranged agreement with either the current Directors or an interested 3rd party to buy the company assets at market value. Then upon entering Administration, all agreed-upon assets such as machinery and property etc, are sold to the new company. Employee contracts may also be transferred and the business can resume trading seamlessly.
Find out more information on Pre Pack Administration.