What are the options for company closure?
There is no limit on the lifespan of a company but most exist for less than 20 years, so company closure is very common.
Many companies trade successfully but are closed when they have served their purpose. Companies are commonly set up for specific projects and then closed when they are no longer required. Similarly many owner/directors will want to close their company on retirement having sold on the core of the business.
Other companies have to close because they have run into difficulties, financial or otherwise. The options available will depend on the circumstances of the company.
Solvent company closure
If a company is solvent (i.e. it can pay all its debts) it will be able to be closed using a Members Voluntary Liquidation (MVL). This can be very advantageous from a tax point of view such that the tax savings easily exceed the cost of the liquidation. Our Insolvency Practitioners can act as liquidator in MVLs. An MVL is instigated by the shareholders.
MVLs can also be useful as part of a restructuring of a successful business where business partners have decided to go their separate ways and wish to split their business. Here the MVL can be used in live trading situations and operations can continue unaffected throughout.
Please see our MVL page for more information on MVLs.
Insolvent company closure
If a company is insolvent it will sometimes have to close even if the core business is viable. If insolvency is a problem it is worth taking specialist advice as there may be options available to rescue the business.
If the company must close, a Creditors Voluntary Liquidation is often appropriate. In a CVL a liquidator is appointed to liquidate all the company’s assets and, where possible, to distribute the funds realised between the creditors in proportion to their claims. (Creditors will normally need to prove their debts by filling out the Proof of Debt form supplied to them by the liquidator.) Our Insolvency Practitioners can act as liquidator in CVLs.
A CVL is instigated by the shareholders. The assets of the company can be used to pay for the liquidation. If company itself doesn’t have funds for a CVL it can be funded by a director/shareholder personally. Please see our CVL page for more information on CVLs.
If the shareholders do not put an insolvent company into liquidation a creditor may petition the court for a compulsory liquidation instead. In this case a government Official Receiver will act as liquidator. If the liquidation order is granted the Official Receiver may well close down the business even if it was still trading at the time.
Strike off and dissolution
A strike off is likely to be much cheaper than a liquidation and does not require the involvement of an Insolvency Practitioner (or the Official Receiver). There are a number of conditions to be met and procedures to go through before a company can be struck off though. Among these are the need to wait at least 3 months after the company ceases trading before applying for the strike off. The company will need to notify creditors of any intention to strike off and they may object to it.
If the company has been trading any employees who are owed money, including redundancy pay, may have difficulty claiming from the Redundancy Payments service. It may therefore be worth funding a liquidation so employees can be paid their redundancy entitlements.
A company may be struck off by Companies House for various reasons including failure to file accounts.
Dormant
If a business has ceased trading but is still wanted it can notify HMRC and Companies House that it is dormant. The company must still file accounts and a confirmation statement annually and it will need to notify HMRC and Companies House when it begins trading again.
What is the meaning of company liquidation/winding up?
Company liquidation is when a company is put into liquidation all its assets are liquidated. This normally means selling them and turning them into cash. The proceeds are used first to pay the costs of the liquidation, then the creditors and the rest is paid to the shareholders. If the proceeds are not enough to pay out the creditors in full they are shared out between the creditors instead.
The terms ‘winding up’ and ‘liquidation’ are very similar in meaning and are used interchangeably in most insolvency contexts in the UK.
Company liquidation is a formal insolvency process. The primary legislation for all UK liquidations is contained in the Insolvency Act 1986.
How can I tell if a company is in liquidation?
There are a number of signs that a company is in liquidation.
- Companies House. When a liquidator is appointed s/he will notify Companies House. The company’s status will be updated to show the company is in liquidation. It can take a couple of weeks for the status to be updated.
- London Gazette. The company liquidation is normally advertised in the London Gazette. You can search their website for free. This is often updated before Companies House.
- Website. If the company has an active website there may be a message stating that the company is in liquidation.
- Stationery. When a company goes into liquidation the company’s stationery is updated to show that the company is in liquidation.
Why do companies go into liquidation?
Company liquidation is a formal procedure to provide for the fair and orderly winding up of companies in the UK. The process is designed to ensure that the interests of all stakeholders, and the economy generally, are served. In a liquidation stakeholders’ rights are defined and stakeholders with equal rights are dealt with equally. Without a formal liquidation process there is a risk that matters will be dealt with on a ‘first-come-first-served’ or ‘he-who-shouts-loudest’ basis.
What types of liquidation are there?
There are three types of company liquidation:
- Members Voluntary Liquidation (MVL) – this is only available for solvent companies.
- Creditors Voluntary Liquidation (CVL) – normally this is used when the directors of an insolvent companiy have decided to cease trading.
- Compulsory Liquidation – this is when an interested party (not necessarily a director or shareholder) has applied to the court for a company liquidation.
Who can put a company into liquidation?
To go (directly) into Members Voluntary Liquidation or Creditors Voluntary Liquidation the shareholders must pass a resolution to put the company into liquidation.
Company creditors can make a petition to the Court for a company to be wound up. The creditor will need to prove that the company owes at least £750 and that the company cannot pay. The petitioning creditor will also need to pay a petition deposit as well as court fees. These total £1,880 at the time of writing. There is no guarantee that a petitioning creditor will receive a refund on their deposit (or any dividend from the liquidation). Companies can also be wound up compulsorily for other reasons apart from an inability to pay debts e.g. where the court is persuaded that it is in the public interest to do so.
NOT LEGAL ADVICE.
Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Silva professionals will be pleased to discuss resolutions to specific legal concerns you may have.