How to close a company

How to close a company

There are many reasons for closing a limited company, but whatever the reason it has to be done properly and legally. Failure to do so can result in a fine or possible prosecution.

If you’ve decided to close your business, you have a choice of formal and informal processes. However, not every option will necessarily be available or applicable to your particular situation.

Solvent or insolvent?

The first step is to establish whether your company is solvent or insolvent, as this will narrow down the options for dissolving it. Two tests are used to determine solvency:

  • The cash flow test – if your company can pay its debts as and when they fall due
  • The balance sheet test – if your company has more assets than liabilities

If it fails either of these, the company is deemed to be insolvent. But, unless you made a personal guarantee as a company director, all the liability lies with the business rather than the individuals who own or run it. This means that once assets have been sold off, any outstanding debt is likely to be written off.

Formal ways to close a company

There are two main insolvency procedures for closing an insolvent company: one is carried out voluntarily and one is imposed. Creditors’ Voluntary Liquidation (CVL) is used if a company’s directors and shareholders decide it cannot pay its debts, so they elect to wind up the company and disperse any assets to those it owes money to. Compulsory Liquidation, on the other hand, is when a business is wound up by order of the court after a creditor has filed a winding-up petition.

Not all companies entering liquidation have to be insolvent. Directors wishing to close a solvent company, perhaps due to retirement or because it no longer has a purpose, can opt for Members’ Voluntary Liquidation (MVL).

When a company has been through any of the formal liquidation procedures, it ceases to trade and is removed from the Register of Companies, hence the expression struck off the register at Companies House.

An application to strike the record of a company from Companies House is known as a strike-off application.

Applying to be struck off

However, liquidation isn’t the only option, as there’s also an informal way to close a limited company that’s no longer needed and is not actively trading. Directors can request to have it struck off the register and dissolved providing that it:

  • Hasn’t traded or sold off any stock in the last three months
  • Hasn’t changed its name within the last three months
  • Isn’t threatened with liquidation
  • Has no agreements with creditors, e.g. a Company Voluntary Arrangement (CVA)

The striking-off application must be signed by a majority of the company’s directors and submitted to Companies House along with the £10 fee. A copy must also be sent within one week to all interested parties, including HMRC, creditors, employees and members, in case there are any objections.

Once the application’s been accepted, Companies House will no longer chase for further compliance and will place a notice in the London Gazette giving two months’ notice of its intent to remove the company from its register.

It’s important to note that any business assets must be distributed among the shareholders before the company is struck off. From the date of dissolution, the company’s bank account will be frozen and any assets – including bank balances – will pass to the Crown.

Tax considerations

You might have to pay Capital Gains Tax on the amount taken out from the company (usually called a distribution), although tax relief on this may be available through Entrepreneurs’ Relief (a personal tax relief that can reduce the tax rate applied to shareholder distributions to as low as 10%).

However, if the amount is more than £25,000, it will be treated as income and you’ll have to pay Income Tax on it as a dividend and not as capital distribution; unless you follow a Members’ Voluntary Liquidation Process which will usually trigger capital tax treatment of the distribution from the company and may allow the use of Entrepreneurs’ Relief.

Although striking off the company is usually the cheapest way to close it, an MVL may be the most tax-efficient method depending on the amount of funds for distributing to shareholders and the tax saving will often be far greater than the cost of the liquidation process

Since the introduction of the Extra-Statutory Concessions Order 2012 any distribution over £25,000 on the closure of a solvent company will be treated as income for tax purposes unless an MVL is used. If an MVL is used, they will be classed as capital receipts and will receive a lower rate of tax. An MVL could also allow for the use of Entrepreneurs’ Relief.

We strongly recommend seeking independent tax advice to advise on the availability of Entrepreneurs’ Relief and to run a comparison between the tax position between a strike-off and a members’ voluntary liquidation.

Concerns surrounding company strike offs

The voluntary strike-off procedure is not an alternative to formal insolvency proceedings (where appropriate). Even if a company is struck off and dissolved, creditors could still apply for it to be restored to the register, enabling them to pursue outstanding debts.

The reality is that in many cases it’s too easy for a company to get struck off when it owes money to third parties. This is partly due to the reduction in the timeframe from three to two months (Small Business Enterprise and Employment Act s.103 – Accelerated Strike-off), meaning less time for objections to be lodged.

In addition, if a complaint is received about the actions of the director of a dissolved company, current statutory requirements make it time consuming and costly for the Secretary of State to carry out an investigation. This is because the legislative framework is designed to enable investigations into live or insolvent companies only.
The vast majority of the c.400,000 company dissolutions annually are legitimate and don’t involve any form of misconduct. However, a small number of company directors are avoiding debts or being held accountable for misconduct by allowing – or even actively causing – their companies to be struck off instead of going through a formal insolvency process. In some cases, this is a repeated occurrence.

To address this issue, the Government is considering introducing additional powers to investigate director conduct in a dissolved company to help maintain confidence in the UK business environment.

The importance of sound advice

Some cynics believe that insolvency practitioners won’t tell company directors about a strike-off option in the hope that they’ll be able to charge for a liquidation. Equally, there are plenty of businesses with and without insolvency licences selling strike-off services to companies for significant fees, that could pay just £10 to Companies House to be struck off themselves.

What’s essential is to determine which method is most suitable for you and your company. Our experienced Licensed Insolvency Practitioners offer a free initial consultation, which will review your specific business situation and present you with all the available options, including a company strike off where applicable.

So by speaking to us, you really have nothing to lose. But you may well save yourself some money – or some problems – further down the line.