What’s the best way to close a company that can pay its debts?
If your company can afford to pay all its debts, it’s solvent. You can close a solvent company by:
- Striking it off the Companies House register, also known as dissolving it; or
- Entering a formal liquidation procedure called a Members’ Voluntary Liquidation
Closing a company via Strike Off
If your company is solvent and does not have significant assets or profits to distribute to the shareholders, Strike Off is usually the most cost-effective way to close it down.
First, you must prepare for Strike Off. You can do that by making permanent staff redundant, preparing and paying final tax submissions, distributing the assets to the shareholders, filing final statutory accounts and closing the company’s bank accounts.
As long as you have not traded or changed the company’s name in the last three months, and do not have any ongoing repayment agreements with creditors, you can then apply for Strike Off. You can do that online or by completing form DS01 and paying a small fee.
Companies House will advertise your intention to Strike Off in the Gazette to give interested parties, such as creditors or shareholders, the chance to object. If there are no objections to your application, your business will be ‘struck off’ the official register after around two months and cease to exist.
Closing a company via a Members’ Voluntary Liquidation (MVL)
If your company is solvent and has significant assets or profits to distribute to the shareholders, a Members’ Voluntary Liquidation is usually the most tax-efficient way to close it.
That’s because all the proceeds from an MVL are subject to Capital Gains Tax. If you used Strike Off, you’d pay Income Tax on anything over £25,000. As a director, you may also be able to claim Business Asset Disposal Relief, which reduces the rate of CGT you pay to just 14%.
In an MVL, you must appoint a licensed Insolvency Practitioner to liquidate the company on your behalf. They will value and sell the business’s assets and use the proceeds to repay any debts before handing the profits to the shareholders. They’ll then remove the company from the official register to dissolve it.
What’s the best way to close a company that can’t pay its debts?
If your company cannot pay its debts, it’s worth exploring whether rescue methods, such as informal creditor agreements, Company Voluntary Arrangement and Administration, could save it. However, if the company has no realistic prospect of making a recovery or you no longer want to run it, you can close it voluntarily via a Creditors’ Voluntary Liquidation (CVL).
Closing a company via a Creditors’ Voluntary Liquidation
Like an MVL, you must appoint an Insolvency Practitioner to administer a Creditors’ Voluntary Liquidation on your behalf. They will value and sell its assets and repay the creditors in a strict order.
As the company is insolvent, it will not be able to repay all its debts in full. Ordinarily, any debts the liquidator cannot repay from the sale of assets will be written off and will not pass to the directors or shareholders personally.
However, as part of the CVL process, the liquidator must investigate the reasons for the company’s failure and the conduct of its directors. They will send a report to the Insolvency Service, which could impose penalties if there are examples of misconduct. Those penalties include fines, being made personally liable for the business’s debts and disqualification from acting as a company director for up to 15 years.
Closing a company via Compulsory Liquidation
Creditors’ Voluntary Liquidation is not the only way to close an insolvent company. Third parties you owe money to, such as HMRC and lenders, can apply to the court using a Winding Up Petition to force your company into Compulsory Liquidation.
If you do not pay the money you owe, the court will arrange a hearing to decide whether to make a Winding Up Order against your business. If it does, it will appoint an Official Receiver to liquidate your company.
Compulsory Liquidation is best avoided as it increases the risks of adverse financial and legal consequences for you as a director. Your actions will be closely scrutinised, potentially leading to penalties and damage to your professional reputation and future business opportunities.
Don’t Fall Foul of Unqualified AdviceDo you need help closing your limited company?
If you’re unsure of the best way to close your limited company or want assistance implementing these closure methods, please get in touch. Our company closure experts will assess your company and explain your closure options. We can also administer the procedures on your behalf. Contact our team of licensed Insolvency Practitioners or arrange a meeting at your nearest office.
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We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.
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