Closing a limited company isn’t a decision to make lightly. If, after considering all the internal factors, including the company’s solvent position, the will of its directors, and external factors, such as market conditions and customer habits, you still want to close your company, these options will have a bearing on how you go about it.
So, how can you close a solvent company or an insolvent company, and what happens if you do nothing?
Solvent or insolvent closure?
Your company’s solvent position will influence your options around closing it.
If your company is solvent, it has enough assets, including cash in its bank account, to cover its liabilities as and when they fall due. However, directors might wish to close it due to the following circumstances:
- Directors want to retire or have no interest in continuing to run the business.
- The company is no longer viable due to a change in the market.
- A large-scale reorganisation or restructuring of several companies means the company has to close.
If the company is insolvent, the company could find itself in an undesirable position where:
- It can’t pay its liabilities as they fall due.
- Its liabilities exceed its assets.
- Creditors have, or are threatening to take legal action against the company.
- Recovery through repaying in instalments or restructuring isn’t feasible, or previous attempts have failed.
As a company director, you should always be aware of its solvent position, and that solvent position determines the company’s options if you decide to close it down.
Closing a solvent company
Depending on the value of its assets, a solvent limited company can have two closure options depending on the value of its assets:
- Closing via a solvent liquidation.
If your company has more than £25,000 in assets, then it may be viable for a Members Voluntary Liquidation (MVL). An MVL can be a cost-effective and tax-efficient way of closing a solvent company, and potentially allows the directors to take advantage of Business Asset Disposal Relief.
- Closing through a dissolution.
If the company lacks the assets for an MVL, but it has no outstanding debts and has ceased trading for longer than three months, directors can dissolve it. Dissolution strikes the company off the Register of Companies at Companies House, thus ending its legal existence.
Additionally, the company must not have committed the following in the three months leading up to the dissolution:
- Changed its name.
- Have any prosecutions or disqualifications against it.
- Has a non-finalised pension scheme.
- Appointed an administrative receiver.
Insolvent companies should not enter dissolution as the process is not designed for them. A creditor can apply to restore a dissolved company up to six years after the dissolution if they have valid reason to.
Closing an insolvent company
Directors of insolvent companies have a different set of options and must act quicker than if the company was solvent. The level of debt in the company will have a bearing on the options available.
- Repaying in affordable instalments.
If the company has a viable business model, but burdensome debts are hindering its profitability, then it might be able to repay its debts in affordable instalments. This can be done through a Company Voluntary Arrangement (CVA). The process lasts five years, with the company’s unsecured debts consolidated into a single monthly repayment, with the debts usually repaid over a period of five years. The company continues trading for the arrangement’s duration, helping to maintain a positive public image.
- Protect against creditor pressure through restructuring.
If the debts are of such a level that repayment alone isn’t feasible, restructuring the company through administration might be a viable route out of insolvency. The process involves a licensed insolvency practitioner investigating the company’s circumstances and exploring the options available to return it to profitability.
- Closing the company and starting again.
If the company’s debts are of such a level that it’s unlikely to recover, then you might be better off closing the company down, draw a line under the company’s debts and start afresh. Directors can do this by putting the company into a Creditors Voluntary Liquidation (CVL). This sees the insolvent company closed in an orderly manner, with a line drawn under its debts, allowing the directors to leave and start a new company so long as they’re not subject to any disqualifications or restrictions.
Will the insolvency go away if I do nothing?
While it might sound tempting to ignore the problem in the hope that it will go away, doing nothing if the company is insolvent will only make the situation worse. Directors should always act in the best interest of the company and its creditors, and ignoring insolvency goes against this. Your creditors can even take further action to recover what your company owes them if you don’t repay on time.
This could include:
- Legal action.
If creditors’ repayment reminders go ignored, they can issue a Statutory Demand or County Court Judgment (CCJ). These can negatively impact a company’s credit rating if they’re not repaid or set aside within the time specified in the paperwork, with CCJs staying on the company’s credit file for six years. They can also lead to visits from debt collectors and even bailiffs.
- Winding-up petition.
If you continue to ignore legal action from creditors, they can, in the worst-case scenario, apply for a winding-up petition. They can do so if your company owes a creditor more than £750. The petition can lead to the company’s forced entry into compulsory liquidation if it isn’t successfully challenged. The company’s bank accounts freeze, forcing a cease to trade.
In summary
A limited company’s solvent position often has a bearing of how its director can close it. Solvent companies can undergo a dissolution, or if it has sufficient assets, directors could place it in a Members Voluntary Liquidation (MVL). If the company is insolvent, then it should enter a Creditors Voluntary Liquidation (CVL) before the creditors force it into compulsory liquidation via a winding-up petition.