Before deciding to close your limited company, you should carefully consider all your options and your company’s circumstances, including but not limited to:
- Its solvent position
- The will of its directors
- Current market conditions and customer habits
If, after considering all the relevant factors, you decide to proceed with closure, your company’s solvent position will have the greatest bearing on how that closure is conducted.
What is the company’s solvent position?
Your company is solvent when it has enough assets, including cash at the bank, to cover its liabilities when they fall due. Even if this is the case, you may still choose to close your company if:
- You or the other directors wish to retire with no line of succession or continuation
- The market has changed to the point where the business isn’t viable
- The company is undergoing reorganisation or restructuring as part of a merger
Your company is insolvent if:
- It can’t repay its liabilities when they fall due
- Its liabilities exceed the value of its assets
- Your creditors are threatening legal action
- Recovery-focused insolvency arrangements have failed or aren’t feasible
As the company’s director, you should always be aware of your company’s financial position, including whether it is solvent or insolvent, and take the appropriate action for the situation.
Solvent company closure
If your company is solvent, the best route forward will likely be determined by the value of its assets.
- Dissolution
If your company has no outstanding debt, you can close it through a dissolution. Doing so removes it from the Register of Companies at Companies House and ends its legal existence. Dissolution may be a viable option if, within the three months leading up to its application:- The company hasn’t traded
- The company hasn’t undergone a name change
- There are no prosecutions or disqualifications against it
- The company’s pension scheme is finalised
- There is no administrative receiver appointed
While an insolvent company can attempt a dissolution, its creditors can apply to restore it for up to six years afterwards if the company owes them money.
- Solvent Members Voluntary Liquidation (MVL)
A company may enter an MVL if it has more than £25,000 in assets, including cash at the bank. The process can be more tax-efficient and cost-effective than a dissolution if the company has the assets to justify it, and it allows directors and shareholders to take advantage of Business Asset Disposal Relief (BADR).
Insolvent company closure
If your company is insolvent, you’ll have different options and less time to act if you want to achieve your desired outcome, as insolvency is often accompanied by creditor pressure.
Closure isn’t necessarily your only option if your company is insolvent. Recovery procedures may be available if the company has a viable business model or if it could be rescued as a going concern. However, if neither of these are viable, then closing the company may be in its best interests and those of its creditors.
- Insolvent Creditors Voluntary Liquidation (CVL)
A CVL is a formal closure process that draws a line under the company’s unsecured debts and allows the directors to walk away and potentially start afresh in a new company if they’re not subject to any post-liquidation restrictions such as directorial disqualifications.
What if I don’t address my company’s insolvency?
Ignoring your company’s insolvency will only worsen the situation, and doing so means you’re not acting in the company’s best interests, or in that of its creditors. If your creditors’ debts continue to go unpaid, those creditors can take further action to recover that amount.
This action could potentially include:
- Court orders and demands
Ignoring reminders from your creditors means they can file Statutory Demands and even County Court Judgments (CCJs) against your company. The latter of these can negatively impact the company’s credit rating if they’re not satisfied or set aside within the time specified in the judgment, staying on the credit file for six years. This can make it harder to obtain credit in the future and can lead to debt collectors and bailiffs visiting your company. - Forced entry into compulsory liquidation
Continuing to ignore this action from your creditors means they can force your company into liquidation. If your company owes more than £750, the creditor can apply to the court for a winding-up petition. This can lead to a winding-up order if not challenged, and can see the company forced into compulsory liquidation, wherein its bank accounts freeze, making trading impossible.
Summary
One of the biggest factors that influences how a company closes is its solvent status. If the company is solvent, it can close through dissolution or a solvent liquidation, depending on its level of assets. Insolvent companies should close via a Creditors Voluntary Liquidation (CVL), as this is preferable to the company being forced into compulsory liquidation by its creditors.
