Find out how you can close down a solvent or insolvent company
Closing down a limited company formally involves liquidation. There are three methods: two initiated voluntarily by company directors, and one arising from creditor action (Compulsory Liquidation).
This article explains the company liquidation process, details each method, and outlines the director’s role.
Exploring different types of liquidation
Liquidation, whether voluntary or compulsory, is the procedure of concluding a company and converting its assets for the advantage of its members (directors and shareholders) or its creditors (those owed money). The choice of liquidation method hinges on your specific circumstances.
1. Creditors’ Voluntary Liquidation (CVL)
If the business becomes insolvent, the responsibilities of the company directors change, and you must prioritise the interests of your creditors.
The initial step is to reach out to an insolvency practitioner. They can guide you on the most suitable course of action and explore alternative options, such as a Company Voluntary Arrangement (CVA), that might allow the business to continue operating.
If it’s determined that the company is no longer sustainable and there are no other options, the shareholders must approve a resolution to close the company during a general meeting.
Subsequently, you can appoint an insolvency practitioner to serve as the liquidator. They will assume control of the company, sell its assets, and allocate the proceeds to creditors before concluding the company’s affairs.
Opting for voluntary winding up of an insolvent company does offer specific advantages. Initially, the directors have the freedom to select the liquidator and retain some control over the timing of the liquidation.
Additionally, it demonstrates responsible action, avoiding exacerbating creditors’ positions through ongoing trade. This reflects positively on your directorial conduct, minimising the likelihood of personal liability for company debts or facing a directorial ban.
2. Members’ Voluntary Liquidation (MVL)
This is the method employed to shut down a solvent business still capable of trading, but where the directors no longer wish to manage it. This might be because the directors wish to retire and there’s no one to continue the business, or they want to explore new ventures.
To initiate the procedure, the company directors must issue a formal Declaration of Solvency. This declaration asserts that the company and its assets hold adequate value to settle all the company’s creditors, along with statutory interest, within 12 months.
Subsequently, the shareholders can call a general meeting and pass a resolution to commence the process.
An insolvency practitioner selected by the directors or shareholders can be assigned to close the company. Serving as the liquidator, the insolvency practitioner will sell the business’s assets at a reasonable value, settle any outstanding creditors, and allocate the remaining funds among the shareholders before officially dissolving the company.
The advantage of opting for a Members’ Voluntary Liquidation over alternative approaches to conclude a solvent business lies in its ability to enable shareholders to withdraw funds from the company in a tax-efficient manner.
Funds extracted through an MVL are liable to capital gains tax rather than income tax. Additionally, one can apply for Business Asset Disposal Relief to trim the CGT to a mere 10%, within a lifetime cap of £1 million.
3. Compulsory Liquidation
Failing to settle a debt owed to a creditor, be it a supplier, bank, or HMRC, may lead to them filing a Winding Up Petition. This could result in a court issuing a Winding Up Order.
Once such an order is in place, an Official Receiver will be designated to oversee the Compulsory Liquidation procedure.
They will take charge of your business, and identify and sell any assets, ensuring the proceeds benefit your creditors before ultimately shutting down your company.
As the liquidation is compelled by your creditors, you won’t have the option to select the insolvency practitioner or determine the timing of the process.
The liquidator will also scrutinise the directors’ conduct in the period preceding the liquidation. If evidence of wrongdoing surfaces, you may be held personally responsible for company debts or potentially encounter director disqualification.
What is the process of liquidating a company?
If you opt for voluntary liquidation of your company through an MVL or CVL, here is an overview of the process:
- Appoint a liquidator – Directors select a licensed insolvency practitioner to serve as the liquidator and oversee the process.
- Declaration of solvency by directors – In an MVL, directors sign a Declaration of Solvency before commencing the process, confirming the business can settle all debts within 12 months.
- Meeting of directors – Directors convene to pass a ‘Special Resolution to Wind Up.
- Proceed with a shareholders meeting – Subsequently, shareholders vote on whether to approve the resolution for company liquidation. The resolution passes if 75% of shareholders (by the value of shares) are in agreement.
- Notify relevant parties – The liquidator is obligated to inform the Companies House, company employees, creditors, and other pertinent parties about the decision to liquidate.
- Prepare a Statement of Affairs – A comprehensive report detailing the company’s assets and liabilities must be compiled. In a CVL, this should also encompass information such as creditors’ names and the value of their debt.
- Asset sale and fund distribution – The liquidator takes charge of gathering and selling the company’s assets, using the proceeds to repay creditors. Any remaining funds are then distributed among the members.”
- Company Dissolution – The liquidator submits final documents to Companies House, officially deregistering the business from the Companies Register. The company will subsequently cease to exist.
What are the duties of company directors during liquidation?
Upon entering liquidation, your role as a director undergoes substantial changes. Your customary powers and responsibilities cease, and control of the company is relinquished.
While you no longer have the authority to make decisions regarding the business, your cooperation is anticipated in assisting the liquidator with the company’s closure by providing the necessary documents and information.
In a voluntary liquidation, the initial task for a company director is typically to aid the liquidator in crafting the Statement of Affairs. This document serves as a comprehensive handover, updating the liquidator on all aspects of the company. It should encompass an employee list, creditors, and suppliers, along with asset valuations, a recent balance sheet, and thorough details of any debts. In Compulsory Liquidation, the liquidator takes charge of preparing the Statement of Affairs.
In an insolvent liquidation, which includes a CVL or Compulsory Liquidation, the liquidator may request an interview to understand how the company was managed and the causes of its downturn. Attendance at this interview is a legal obligation, and you must answer the questions to the best of your ability.
As a general rule, directors of limited liability companies are shielded from personal liability for company debts in insolvent liquidations. Nevertheless, if you have endorsed a personal guarantee, maintain an overdrawn director’s loan account, or there is proof of director misconduct, you may be deemed accountable for some or all of the company’s debts.
Can I liquidate my company myself?
Regardless of the suitable liquidation process for your situation, you’ll need help from a licensed insolvency practitioner.
For the two voluntary liquidation methods – Creditors’ Voluntary Liquidation (CVL) and Members’ Voluntary Liquidation (MVL) – an insolvency practitioner will guide you on options and ensure that liquidation is the optimal choice for you and your business.
If it is, they’ll take control of the business, liaise with remaining creditors for you, and manage the process from beginning to end.
In Compulsory Liquidation, the company’s creditors kickstart the process. In this case, the Official Receiver, the government’s equivalent of an insolvency practitioner, may be appointed. They will seize control of your business, liquidate your assets to benefit your creditors, and ultimately shut down the company.
They might also submit a report on your directorial conduct, possibly resulting in actions taken against you.
What happens after my company liquidation?
After liquidating the company, it will no longer exist as a legal entity. In a member’s voluntary Liquidation, there are no limitations on your subsequent actions, whether you choose to retire, establish another business, or seek employment.
In an insolvent liquidation, as long as the liquidator raises no concerns about your conduct, you won’t encounter additional consequences, and you’re at liberty to establish a new limited company. Nevertheless, if you intend to launch a new business within the same industry, there are regulations regarding so-called ‘phoenix companies’ that you should be mindful of.
Do I need to pay to liquidate my company?
You are required to cover the professional fees of the insolvency practitioner serving as the liquidator. In many instances, these fees are funded through the proceeds from the sale of company assets, potentially relieving you from personal payment.
The expenses will vary based on the company’s size, the quantity of assets it possesses, and the intricacies of the liquidation process.
If the company lacks assets to cover the liquidation expenses, you might be personally responsible for the fees. In certain cases, directors’ redundancy pay, for which you may qualify, could potentially help offset these costs.
Read More:
- Who can petition to wind up my company
- What is wrongful trading in company insolvency
- Limited Company Fraudulent Trading Explained
- Are directors liable for limited company HMRC tax debts
- What are voidable transactions in an insolvency process
Are thinking about liquidating your company?
If you are contemplating the liquidation of your solvent or insolvent company, contact our insolvency practitioners at your earliest convenience.
We offer a complimentary, confidential, and obligation-free consultation to assist you in comprehending the options available for closing your company. Reach out to our team today or locate your nearest office for a face-to-face meeting.
I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.