As with starting a limited company, shutting one down comes with its own set of rules and processes. Whatever your reason for closing a company, this article will take you through the procedures involved with company dissolution, also known as strike off.
What are the differences between closing a solvent and insolvent business?
- If your business is solvent, i.e. has money in the bank and is able to pay its creditors, you can (i) apply to get your business struck off the Companies Register or (ii) start a Members Voluntary Liquidation (MVL).
- If your business is insolvent, you’ll need to follow a Creditors Voluntary Liquidation (CVL) process.
These are voluntary processes, as opposed to a Compulsory Liquidation which is forced on a business by its creditors.
Are there conditions for getting my company struck off the Companies Register?
- Your business can’t have traded during the preceding three months.
- The company’s name can’t have been changed in the preceding three months.
- There can’t be any threats of liquidation.
- There can’t be creditors’ agreements in place, such as a Company Voluntary Arrangement.
If these conditions don’t apply, then you’ll need to apply for voluntary liquidation (MVL or CVL), or alternatively wait until the conditions do apply.
Are there steps to take before I can get my company struck off the Companies Register?
Before a company is struck off, it needs to be legally closed by:
- Informing interested parties: creditors; employees; shareholders; trustees of employee pension funds; directors and HMRC.
- If you employ staff, follow procedures regarding: redundancy payments, holiday pay, and outstanding salaries.
- Apportioning business assets between shareholders. Remaining assets go to the Crown – you would have to restore your company to get anything back.
- Ask HMRC to close the payroll scheme. File statutory accounts and tax returns – inform HMRC that these are the final accounts.
- Pay outstanding tax liabilities, such as corporation tax and VAT.
- Close the company’s bank accounts.
- Transfer any web domain names.
A full list of instructions is on the GOV.UK website.
You’re ready to apply to strike off your company with Companies House once you’ve followed the above steps. The directors must resolve (either at a board meeting or by board resolution) to close down the company, then you should submit Form DS01.
Quality Company Formations offer a full Company Dissolution Service for only £49.99 plus VAT. All you need to do is electronically sign the application to dissolve and we will do the rest, which includes paying the Companies House fee of £10.00, filing the DSO1 form and preparing a board resolution to approve the dissolution.
If your application is accepted, a notice will be put in your local Gazette. This invites any interested parties to object. Assuming this doesn’t happen, there will be a second notice, two to three months later, announcing that the company has been dissolved.
Once my company has been dissolved, do I need to keep my business documents?
You should keep all your business documents (including bank statements, invoices and receipts) for seven years after the striking off period. If your company had employees, it is necessary to keep copies of the employers’ liability insurance policy and schedule for 40 years from the date it was dissolved.
Why might there be objections to a company being struck off?
- Interested parties weren’t informed about the proposed strike off.
- A declaration on the DS01 form is false.
- The company hasn’t complied with the conditions for striking off.
- There is an action (or pending action) to recover money owed by the company.
- Other legal action is being taken against the company.
- One or more of the directors has committed tax fraud or another offence.
- The company has been wrongfully trading.
- HMRC may object to a strike off for unpaid tax bills.
Objections must be sent to the Registrar of Companies. If any of these are upheld by the Registrar before the 2-3 months is up, then the strike off will be suspended.
Can I withdraw an application to have my company struck off?
If you change your mind or your company becomes insolvent you can withdraw the application, providing your business is still on the Companies Register.
To withdraw your application, you should complete Form DS02.
What is a Members’ Voluntary Liquidation (MVL), and why choose that over striking off?
MVL is a process used to close a company in a more tax efficient way. Examples of when a MVL might be preferable include:
- a business owner is retiring with nobody to take over the business.
- a director wants to free up assets from an existing company to fund a new one.
- a group of companies is being reorganised and the company in question is no longer required.
- the company was an IR35 company and is no longer needed.
Although MVL is a more expensive option, because a liquidator needs to be appointed, it can be a more tax-efficient approach. If the amount of funds to be distributed amongst shareholders exceeds £25,000, you’ll pay a lower capital gains tax with MVL, as opposed to a higher rates of income tax.
What’s the process for a MVL?
A Declaration of Solvency will have to be signed by a majority of directors. This is a statutory declaration which states the company will be able to repay its debts, along with any interest, within a fixed period of time not exceeding 12 months.
An Extraordinary General Meeting has to be called within five weeks of the declaration. A Special Resolution will be passed, agreeing to the liquidation and the appointment of a liquidator. Within 14 days of their appointment, the liquidator must give notice of their appointment to the Registrar of Companies and advertise the appointment in the Gazette. The liquidator then takes control of the company and carries out their duties, such as gathering and distributing assets accordingly.
How do I close a business if it’s insolvent?
If you are unable to pay your outstanding bills or creditors, your business is classed as insolvent. At this point, the interests of the company’s creditors come before those of the directors or shareholders. If this happens, you may be able to start a Creditors’ Voluntary Liquidation (CVL).
How does a Creditors’ Voluntary Liquidation work?
This type of liquidation can only begin under the guidance of an insolvency practitioner. Steps include:
- Board meeting of directors: once the decision is made to place the company into liquidation, a licensed insolvency practitioner will be enlisted.
- Notify shareholders/creditors: the shareholders and creditors should be notified of a general meeting to approve the company’s winding up, the ‘decision date’ to liquidate the company must be communicated, and a Statement of Affairs showing the company’s financial position, should be sent.
- The liquidation begins: at least 75% of shareholders must have agreed to wind the company up. The liquidator will communicate with creditors, resolve any claims, and distribute the company’s assets between them. If there are employees, they will handle any claims and file any necessary reports with relevant government agencies. Full details of a liquidator’s role is found here Insolvency Act 1986, Chapter IV.
What happens after a Creditors’ Voluntary Liquidation?
The company will be struck off the register at Companies House and will no longer exist. Any remaining liabilities due to insufficient assets will be written off, unless personally guaranteed.
The liquidator will investigate actions by the directors – or any former directors within the past three years. If fiduciary duties were not fulfilled, they could be guilty of fraudulent trading or misfeasance. In this case, they face personal liability for part, or all of the company’s debts. A disqualification from being a director for up to 15 years is possible.
What are the disadvantages of a Creditors’ Voluntary Liquidation?
- Payments may still remain: some scenarios mean outstanding payments should be paid e.g. you’ve given a personal guarantee or borrowed money from the company by way of a Director’s Loan.
- Valuable assets could be lost: company assets will be sold, they can’t be used for new ventures.
- Staff will be lost: if you are considering starting a new, similar business, you may need to build fresh internal staff structures – one way to avoid this is by selling part of your business as a going concern.
- CVL will show up in an extended credit check: this will be on your credit history and may not look good.
- Investigation into the directors’ conduct: if found to have acted wrongfully or been trading fraudulently, they may be made liable for some of company’s debts plus there is the possibility of fines, penalties, and disqualification.
- Liquidators’ costs: the professional fees involved in putting in place a CVA can be considerable.
What are the main advantages of a Creditors’ Voluntary Liquidation?
- It reduces debt repayments: CVL can be a relief for companies struggling financially – most debts will be largely written off. Liquidation costs and repayment of debtors will be made by selling the company’s assets.
- Avoids legal action: any threats of legal action are stopped – creditors are unable to pursue you in court, unless you’ve entered into a personal guarantee with them.
- Image: closing a business voluntarily is preferable to ending a business through Compulsory Liquidation.
- Lease arrangements will end: if a company has entered into HP or lease arrangements, these will end once the company is liquidated.
- Redundancy pay: most directors will want to make sure their staff are protected during this turbulent time. By entering into a CVL, the liquidator organises redundancies (paid from the sale of assets). If insufficient, it is possible to claim from the National Insurance Fund.
- More control: there is control over the timing of when the process starts, as opposed to a compulsory liquidation, where the creditors force the company into liquidation.
- Risk reduction: a CVL minimises the risk of wrongful trading (i.e. carrying on business when insolvent).
What is Compulsory Liquidation?
Compulsory Liquidation is forced on a company by its creditors, normally after a ‘winding up’ petition has been approved in court. An Official Receiver will take over and an investigation into what caused the company to become insolvent will happen.
Any wrongdoing by directors will be investigated and bank accounts will be frozen. A liquidator will be appointed if there are assets to recover.