How To Close a Company?

There are many reasons why directors and shareholders may decide to close a limited company. The owners may wish to retire, the business may no longer be commercially viable, or the company may have completed the purpose for which it was established.

The correct procedure will depend principally upon whether the company is solvent and able to pay its liabilities. A solvent company may be closed through voluntary strike-off or a members’ voluntary liquidation. If the company is insolvent, a formal insolvency procedure may be required.

Closing the underlying business is not necessarily the same as dissolving the company. Before taking any steps, directors should therefore obtain advice about the company’s assets, liabilities, employees, contracts, tax affairs and any actual or potential claims.

Is The Company Solvent?

A company’s financial position should be assessed carefully before a closure procedure is selected.

Broadly, a company may be insolvent if:

1. it is unable to pay its debts as they fall due; or
2. the value of its assets is less than the amount of its liabilities, taking account of contingent and prospective liabilities.

A company may therefore be insolvent even if it is continuing to trade or has sufficient funds to meet its most immediate payments. Equally, a temporary cash-flow problem does not necessarily mean that liquidation is unavoidable.

Directors should obtain appropriate legal, insolvency and financial advice where the company’s solvency is uncertain.

Closing a Solvent Company

If the company can pay its liabilities in full, the principal closure options are voluntary strike-off and a members’ voluntary liquidation.

What is Voluntary Strike-off?

Voluntary strike-off is generally the simplest and most cost-effective means of closing a solvent company that is no longer required.

An application is made to Companies House by a majority of the company’s directors. If the company has two directors, both must apply. If it has only one director, that director may make the application.

However, a company cannot apply for voluntary strike-off if, during the previous three months, it has:

1. traded or otherwise carried on business;
2. changed its registered name; or
3. disposed for value of property or rights which it held for disposal in the normal course of its business.

The company must also not be subject to existing or proposed insolvency proceedings or certain arrangements with its creditors or members.

Limited activity may still be undertaken where it is necessary to decide whether to apply for strike-off, to obtain professional advice, to settle the company’s affairs or to comply with a statutory requirement

Before applying, the directors should ensure that the company has been closed down properly. This will usually include:

1. dealing with employees and final payroll obligations;
2. completing outstanding tax returns and addressing liabilities to HMRC;
3. collecting outstanding debts;
4. paying or making appropriate provision for creditors;
5. terminating contracts, leases and insurance policies;
6. dealing with licences, intellectual property rights and domain names;
7. closing bank accounts; and
8. distributing any remaining assets lawfully to shareholders.

Any property left in the company when it is dissolved, including money remaining in a bank account, may pass to the Crown as bona vacantia. Restoring the company may then be necessary to recover it.

Within seven days of making the application, a copy must be given to those falling within the relevant statutory categories. These include members, employees, creditors, non-signing directors and managers or trustees of any employee pension fund. Failure to comply can constitute an offence.

If the application is accepted, notice of the proposed strike-off will be published in The Gazette. Creditors and other interested parties may object. If no objection is maintained, the company may be struck off and dissolved following the applicable notice period.

Strike-off is not an alternative to formal insolvency proceedings. Even after dissolution, a creditor or another eligible person may apply to restore the company to the register in appropriate circumstances.

What is Members’ Voluntary Liquidation?

A members’ voluntary liquidation, commonly known as an MVL, is a formal procedure for closing a solvent company.

It may be appropriate where the company holds significant assets or retained profits, where the shareholders require a structured distribution process, or where greater certainty and finality are required than voluntary strike-off provides.

Before an MVL can proceed, the directors must review the company’s financial position and make a declaration of solvency. The declaration must confirm that the directors have made a full inquiry into the company’s affairs and believe that it will be able to pay its debts in full, together with applicable interest, within a period not exceeding 12 months from the commencement of the liquidation.

The declaration must include a statement of the company’s assets and liabilities. It must be signed by a majority of the directors before a solicitor or notary public. The shareholders must then pass the appropriate resolution and appoint an authorised insolvency practitioner as liquidator.

Once appointed, the liquidator takes control of the winding-up. The liquidator will realise the company’s assets, pay or make provision for its liabilities and distribute the remaining surplus to the shareholders. The directors’ powers and responsibilities change substantially following the liquidator’s appointment.

An MVL is generally more expensive than voluntary strike-off because an authorised insolvency practitioner must be appointed. However, it may offer advantages where significant sums are to be distributed or where the company’s affairs require formal administration.

The tax treatment of distributions may be an important consideration. Shareholders should obtain specialist tax advice before deciding between voluntary strike-off and an MVL.

Directors’ Duties Where Insolvency Is Approaching

Directors should keep the company’s financial position under close and regular review.

Where directors know, or ought to know, that the company is insolvent or bordering on insolvency, or that insolvent liquidation or administration is probable, they must have proper regard to the interests of the company’s creditors as a whole.

The weight to be given to creditors’ interests increases as the company’s financial difficulties become more serious. Where insolvent liquidation or administration is inevitable, the interests of creditors become paramount. A mere real risk of insolvency at an uncertain future date is not, by itself, sufficient to engage the creditor-interest duty.

Directors should therefore:

1. maintain reliable and up-to-date financial information;
2. keep cash flow, creditor pressure and contingent liabilities under review;
3. hold properly convened board meetings when significant decisions are required;
4. record the information considered and the reasons for decisions;
5. avoid preferring the interests of shareholders over those of creditors where the creditor-interest duty has arisen;
6. take care before making payments to connected parties, declaring dividends or transferring assets; and
7. obtain specialist advice promptly.

Continuing to trade while experiencing financial difficulty does not automatically create personal liability. However, decisions that worsen the company’s position or cause additional loss to creditors may later be scrutinised by a liquidator or administrator.

Options For An Insolvent Company

If the company cannot pay its debts, directors should obtain advice from an authorised insolvency practitioner and an appropriately experienced solicitor without delay.

The available options may include a creditors’ voluntary liquidation, administration or, in an appropriate case, a restructuring process. The correct route will depend upon whether the underlying business remains viable, the company’s assets and liabilities, the attitude of secured creditors and whether a better outcome can be achieved by continuing or selling the business.

Creditors’ Voluntary Liquidation

A creditors’ voluntary liquidation, commonly known as a CVL, is a procedure through which the directors and shareholders take steps to place an insolvent company into liquidation.

The directors will ordinarily seek advice from an authorised insolvency practitioner and convene the necessary shareholder decision-making process. A winding-up resolution requires the agreement of 75% by value of the shareholders voting.

Following the resolution, an authorised insolvency practitioner is appointed as liquidator. The resolution must be sent to Companies House within 15 days and advertised in The Gazette within 14 days.

The liquidator will take control of the winding-up and will ordinarily:

1. secure and realise the company’s assets;
2. collect outstanding debts;
3. distribute available funds in accordance with the statutory order of priority;
4. investigate the reasons for the company’s insolvency; and
5. consider and report upon the conduct of the directors. The company will usually cease trading, although limited trading may sometimes be undertaken by the liquidator where that is necessary to achieve an orderly winding-up or improve realisations.

Administration

Administration is principally a rescue or restructuring procedure rather than simply a means of closing a company.

An administrator must be an authorised insolvency practitioner. Once appointed, the administrator takes control of the company and its assets.

Administration ordinarily gives the company protection from most creditor enforcement while the administrator pursues the applicable statutory objective. This may involve rescuing the company as a going concern, achieving a better result for creditors than an immediate winding-up, or realising assets for distribution to secured or preferential creditors.

The administrator may seek to sell the business as a going concern, negotiate a company voluntary arrangement, sell assets or move the company into liquidation if rescue is not achievable.

Administration does not provide directors with general protection against personal liability. It does not release a director from liability under a personal guarantee or prevent potential claims arising from breach of duty, misfeasance, wrongful or fraudulent trading, preferences or transactions at an undervalue.

Voluntary Strike-off & Insolvent Companies

Voluntary strike-off will rarely be an appropriate way to deal with an insolvent company.

Strike-off is not a substitute for liquidation or another formal insolvency process. Creditors may object to an application, and a dissolved company may subsequently be restored to the register in appropriate circumstances.

Directors should not attempt to use strike-off to avoid dealing with outstanding debts, creditor claims or the company’s affairs through an appropriate insolvency procedure.

What Is Compulsory Liquidation?

If a company is unable to pay its debts, a creditor may present a winding-up petition asking the court to place it into compulsory liquidation.

If a winding-up order is made, the Official Receiver will initially become liquidator, although another insolvency practitioner may subsequently be appointed. The company’s assets will be collected and realised for the benefit of creditors in accordance with the statutory order of priority.

Directors should seek urgent advice if the company has received a statutory demand, winding-up petition or other indication that a creditor intends to commence insolvency proceedings.

The presentation of a winding-up petition can have immediate and serious consequences for the company. Directors should not make unusual payments, dispose of assets or continue trading without first considering the company’s position and obtaining advice.

Personal Guarantees & Directors’ Potential Liability

Limited liability generally means that a company’s debts are not automatically the personal debts of its directors or shareholders.

However, directors may still face personal exposure where they have:

1. given personal guarantees;
2. misapplied company money or property;
3. acted in breach of their statutory or fiduciary duties;
4. caused the company to enter into transactions at an undervalue or preferences;
5. engaged in wrongful or fraudulent trading; or
6. received unlawful dividends or other improper distributions.

The existence and extent of any personal liability will depend upon the particular facts. Early advice can allow directors to identify and manage these risks before irreversible steps are taken.

Choosing The Appropriate Procedure

The correct procedure will depend upon a range of factors, including:

1. whether the company is solvent;
2. whether all debts, including contingent and disputed liabilities, can be paid;
3. the nature and value of the company’s assets;
4. the amount of retained profit or cash available for distribution;
5. the company’s tax position;
6. whether the underlying business remains viable;
7. the existence of secured lending or personal guarantees;

8. employee, pension and contractual liabilities;
9. threatened or ongoing litigation; and
10. the objectives of the directors and shareholders.

Directors should not dispose of assets, repay connected parties, declare dividends or make distributions without considering the company’s financial position and obtaining appropriate advice.

How We Can Help

Closing a company involves more than removing its name from the register. The appropriate route will depend upon the company’s financial position, its assets and liabilities, any outstanding claims, its tax affairs and whether the underlying business can or should be rescued.

If the company is experiencing financial difficulty, directors should obtain advice promptly and before making payments, disposing of assets or incurring further liabilities.

Our specialist commercial litigation and insolvency team can advise directors, shareholders and creditors on:

1. Voluntary strike-off;
2. Members’ voluntary liquidation;
3. Creditors’ voluntary liquidation;
4. Administration and restructuring;
5. Compulsory winding-up;
6. Directors’ duties and potential personal liability;
7. Personal guarantees; and
8. Disputed creditor claims.

Please contact Tom Esler on 01562 820181 or email tom.esler@mfgsolicitors.com for further advice.