Closing a limited company is a complicated process with numerous ways to go about it depending on the situation the company finds itself in. You need to consider whether the company is solvent or insolvent. Knowing this answer will determine the action taken when closing down the company.
If the company is solvent
If you are looking to close a solvent limited company, there are 2 options available depending on the value of company assets. For this purpose, solvency is defined as able to reasonably repay all existing and prospective debts within a period of no more than 12 months.
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 £25,000 left over for distribution to shareholders, then a member’s voluntary liquidation (MVL) is often the most tax-efficient and cost-effective way of closing a limited company. An MVL 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.
An MVL allows shareholders to take advantage of Business Asset Disposal Relief (Entrepreneurs’ Relief), meaning that the MVL process can be a tax-efficient way of closing a limited company. Wilson Field does not offer tax advice and we always recommend speaking to your accountant or a tax adviser before making a decision.
If the realisation of company assets will not be able to provide at least £25,000 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.
There are specific criteria that a company needs to adhere to in order for it to be successfully dissolved. 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 all creditors and other interested parties of the striking off and make them aware that they have 3 months in which to contest it. The company cannot have traded for 3 months prior to the dissolution.
If the company is insolvent
Closing a company is still possible regardless of whether or not the company is solvent, however the processes available 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 liquidations (CVL) 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. A director may not want to close the business, but there simply isn’t enough cash to pay creditors back, which means the business has no viable future in its current form.
Restart your business using a new limited company
Directors of limited companies in some circumstances are able to restart the same business using a new limited company under a different trading name. In special instances, a limited company can use a similar trading name as its predecessor, but there are strict procedures to follow which can involve employing a solicitor for court permission.
Pre-pack administration or pre-pack liquidation
In some cases an insolvent company can sell its business and assets and restart trading in the name of a new limited company, a procedure known as a pre-pack sale. This can be achieved either through administration or liquidation. They work slightly differently, but essentially close down one limited company, with another restarting in the ashes of the old company, which is known as a phoenix company.
A pre-pack liquidation will see the old company ‘oldco’ be liquidated and closed down. During that process, the directors will have the option to purchase assets from the oldco at full market value and transfer them into the new company ‘newco’. Pre-pack administration works slightly differently, as it is a much faster process, whereby the whole sale of a company will be already organised. Remaining staff, assets, work in progress and certain aspects of the company will then simply be transferred over to the new directors.
When it comes to closing a limited company, it firstly depends on whether the company is solvent or insolvent. If insolvent, you may have no choice but to liquidate, which could be forced upon you, or it could be voluntary. If you believe that the company has the ability to continue trading, but could only do so without creditor pressure, then there are different rescue methods which could work. Even through a liquidation, there are ways to move your company forward.
How we can help
If you are looking to close down your company, we can help guide you through the potential procedures. Whether solvent or insolvent, we can advise you on the best route forward. We offer a fast and efficient service with nationwide coverage from a network of regional offices, meaning a free consultation can be arranged at a time and location most convenient to you.
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