Understand Your Closure Options
When it comes to closing a limited company, there are a number of options available to company directors and shareholders depending on the financial and operational position of the business at the time of closure. It is important for directors to understand the closure options open to them, as the chosen method determines how the company’s operations will be wrapped up, its assets distributed, outstanding liabilities settled, and its legal obligations fulfilled.
There are two main ways to bring about the end of a limited company in the UK: liquidation and strike off (also known as dissolution).
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What is Company Liquidation?
Liquidation is a formal insolvency process administered by a licensed insolvency practitioner who will assume the role of liquidator during the process. Liquidation can be used to close both solvent and insolvent companies and can be entered into voluntarily by the directors and shareholders or forced upon the company following a court petition by its creditors. There are three main types of liquidation:
- Creditors’ Voluntary Liquidation (CVL) – This is the most common type of liquidation and is used to bring an insolvent company to a formal and orderly end. A CVL is entered into voluntarily by the insolvent company’s directors who appoint a licensed insolvency practitioner (IP) to oversee the process. The company’s assets are sold, and the proceeds are used to pay off outstanding creditors. Any remaining debt will be written off, and the company will cease to exist as a legal entity.
- Members’ Voluntary Liquidation (MVL) – This is used when a solvent company wants to wind up its affairs and distribute its assets among shareholders. It’s a tax-efficient way to close a limited company, as the distributed assets will be subject to capital gains tax rather than income tax. Shareholders may also be able to take advantage of Business Asset Disposal Relief (BADR), which can lower the tax rate to just 10%. An MVL requires the appointment of a liquidator.
- Compulsory Liquidation: This is initiated by the company’s creditors due to unpaid debts, where a court orders the company’s closure. A liquidator is appointed to sell assets and settle outstanding debts, limiting the control of directors and shareholders over the process.
What is Company Strike Off?
If a limited company is dormant and no longer trading, its directors may opt to apply for voluntary striking off. This process is straightforward and cost-effective, involving notifying Companies House and paying a nominal fee. However, all outstanding liabilities and legal obligations must be settled before applying for strike off. If the company has debts that it cannot repay in full, strike off is not appropriate, as creditors can object.
In conclusion, choosing the right closure option for a limited company depends on its financial status, legal obligations, and the preferences of its shareholders and directors. Each method has its own advantages and disadvantages, so it’s crucial to seek professional advice to ensure an informed decision about the company’s closure.
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At Company Closure we have a nationwide team of licensed insolvency practitioners and company closure experts here to help you understand your options. Whether your company is solvent or insolvent, there is a closure method out there to suit you.
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