Closing Time – How to Navigate Closing Your Limited Company

Closing your limited company requires a lot of consideration, whether the reasons relate to the company’s solvent position or not. It could be down to a change in the market, directors wishing to retire, or if they have no further interest in running the company.  

This guide will outline a director’s options for closing both a solvent, and insolvent company, and what can happen if you choose to do nothing. 

Why is the company closing? 

Company closure is often associated with insolvency, in which the company could find: 

  • It cannot repay bills as and when they fall due. 
  • Its liabilities exceed its assets. 
  • Creditors are threatening to or have already taken legal action. 
  • Recovery processes are unfeasible, or previous ones have failed. 

Companies can also close for other reasons unrelated to financial difficulties: 

  • Directors might wish to retire or have no further interest in running a business. 
  • The company might have lost its viability due to a change in the market. 
  • The company may be closing as part of a larger reorganisation of a group of companies after a merger or acquisition. 

As a company director, you should know your company’s solvent position. If you decide to close the company, that solvent position will determine which process the company might enter to achieve your desired outcome. 

Closure options if the company is solvent. 

Solvent companies can have two closure options depending on the value of their assets: 

Dissolution. Directors can dissolve a company if it has ceased trading for more than three months and it has no outstanding debts. Dissolution involves striking the company off the Register of Companies at Companies House, ending its legal existence.

In addition to not having traded in three months, to be suitable for dissolution, the company must not have: 

  • Changed its name. 
  • Prosecutions or disqualifications against it. 
  • An unfinalized pension scheme. 
  • An administrative receiver in office. 

Dissolution is not designed for insolvent companies, and a creditor can restore a dissolved company up to six years afterwards if they have valid reasons to. 

Solvent Members Voluntary Liquidation (MVL). Directors can explore a Members Voluntary Liquidation (MVL) if the company’s assets total at least £25,000. An MVL can be a more cost-effective and tax-efficient way of closing a solvent company with sufficient assets and can allow the directors to take advantage of Business Asset Disposal Relief. 

Closure options if the company is insolvent. 

If the company is insolvent, then the need to act is greater than if the company was solvent. Speaking to a licensed insolvency practitioner can help guide you to the right solution for your company.  

Acting quickly means it may be possible to save the company through repayment or restructuring. However, if that time has passed, and the level of debts and mounting creditor pressure means recovery isn’t feasible, then the company would be better off closing. In this case, a Creditors Voluntary Liquidation (CVL) will close the company, writing off its debts and leaving the directors free to walk away. A company may enter a CVL if a formal attempt at repaying its debts has failed, or after an administration wherein the business is restructured, with assets potentially sold off. How long a CVL takes can depend on the company’s circumstances. 

What happens if you do nothing? 

Admitting your company is insolvent can feel like an admission of directorial failure, and you might want to bury your head in the sand and ignore the problem. However, doing so will only exacerbate things, and creditors can take further action if they’re not paid on time. 

Such action could include: 

  • Legal action. If you ignore creditors’ repayment reminders, they can escalate to issuing legal action against the company. This could include Statutory Demands or County Court Judgments (CCJs). The latter of which will negatively impact the company’s credit file if not repaid or successfully challenged in the time specified in the judgment. Legal action can also result in debt collectors, and even bailiffs, attempting to recover the debts or assets equivalent to their value from the company. 
  • Winding-up petition. Continue to ignore legal action, and the company’s creditors can opt for more drastic debt recovery options. If the company owes a creditor more than £750, that creditor can file a winding-up petition. If a winding-up petition isn’t successfully challenged, it will result in the company’s bank account being frozen, forcing trading to cease and pushing the company into Compulsory Liquidation. 

To conclude 

A company can close for reasons related or unrelated to its solvent position. Whether the company is solvent or insolvent will have a bearing on how the company can close. Solvent companies can apply for dissolution or close via a Members Voluntary Liquidation (MVL) if they have sufficient assets. Directors of insolvent companies should seek advice from a licensed insolvency practitioner and discuss their options. If closure would be the best option, an insolvent company can close via a Creditors Voluntary Liquidation (CVL). Doing so is often preferable to having creditors force the company into compulsory liquidation through a winding-up petition.