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Closing down a limited company can seem like a daunting task, especially if it has not long ceased trading and has assets and liabilities. Ultimately the end objective is for the company to be dissolved, but how it achieves this will depend on several circumstances.
How should you close a limited company?
If, after taking into account any contingent liabilities, the company is solvent, then either a company application for striking-off or a Members’ Voluntary Liquidation (“MVL”) may be an appropriate route to dissolution. Generally, this depends on whether the company has net assets in excess of £25,000. If it does, then an MVL may be more advantageous to shareholders due to Capital Gains Tax treatment on a Liquidator’s capital distributions.
If the company is insolvent and there is no prospect of rescuing the company or its business as a going concern, then liquidation may be the appropriate procedure.
There are two types of liquidation, Voluntary and Compulsory:
Voluntary is initiated by the directors, shareholders appoint a Liquidator and then creditors are provided with an opportunity to nominate an alternative liquidator or retain the shareholder appointed Liquidator.
Compulsory Liquidation is the Court procedure which is commenced by the presentation and serving of a winding-up petition. Following the making of a winding-up order by the Court, the Insolvency Service or Official Receiver act as Liquidator.
A company application for striking-off can be made when a company is insolvent. However, it is likely that a creditor will object to the proposed striking-off, blocking the proposed route to dissolution. An application in this scenario also puts the directors at risk of committing an offence which could result in a fine and/or imprisonment. It is an offence:
- to apply when the company is ineligeable for striking-off;
- to provide false or misleading information in, or in support of, an application;
- not to copy the application to all relevant parties within in seven days;
- not to withdraw application if the company becomes ineligible.
Sections 1004 and 1005 of the Companies Act 2006 set out the circumstances in which a company may not apply to be struck off.
Company application for striking-off
If appropriate and the company is eligible, the directors can apply for a company to be struck-off. Provided there are no objections, Companies House will dissolve a company two months after the notice is advertised. This process can be quick and cost effective. It does, however, place additional risk and liabilities on the directors should the company not meet the qualifying conditions prescribed by the Companies Act 2006.
Please refer to the following blog for further information regarding closing a company with retained earnings.
Members’ Voluntary Liquidation (Solvent)
If an MVL is an appropriate procedure, a Liquidator will be appointed by shareholders to wind-up the company’s affairs. Once completed and a final account is filed with Companies House, the company is dissolved two months later. This is provided there are no objections. Compared to a company application for striking-off, this process is more costly and can take between six to twelve months to complete. However, in most cases, tax savings to shareholders far outweigh the cost of the MVL.
Voluntary or Compulsory Liquidation (Insolvent)
In either a Voluntary or Compulsory liquidation, the Liquidator is required to realise company assets for the benefit of creditors. Both procedures also require an investigation into the company’s affairs to identify any unfit conduct of the directors and any antecedent transactions which could be recovered by a Liquidator for the benefit of creditors. Once the administration of the winding-up is completed and the Liquidator has filed his final account with Companies House, the company is dissolved two months later. This is provided there are no objections.
In either situation, solvent or insolvent, it is strongly recommended that directors obtain professional advice from their accountant and an Insolvency Practitioner at the earliest stage. This is even more important if the company is insolvent due to additional director duties and potential personal liabilities.
Closing a limited company with debts
If the company is insolvent, then there are a number of options available. If the company or its business cannot be rescued as a going concern, then directors will be considering liquidation and ideally the voluntary process. This process, known as a Creditors’ Voluntary Liquidation (“CVL”), will ultimately result in the company’s dissolution.
The directors may also be considering an application for striking-off. Due to the likeliness of an interested party objecting to the proposed striking-off and the potential risks to the directors in failing to comply with the legal process, this may not be an appropriate route to dissolution. There may also be considerations regarding employee entitlements under the Employment Rights Act 1996 which would only be available in an insolvency process.
It is possible for a company with debts or liabilities to be solvent. Where this is the case, an MVL may be the appropriate route to close down the company and dissolve it. This is because, in an MVL, the company’s assets must be sufficient to meet all the claims (including statutory interest) and costs in full within a period of twelve months following liquidation. A Liquidator will realise the company’s assets, settle all claims and costs and then distribute the surplus funds and assets to shareholders. The liquidation will then end and the company is subsequently dissolved.
An example might be a company which has recently ceased to trade, has retained earnings but still has some residual trade liabilities. Overall, its net asset position is positive and where this value is more than £25,000, an MVL would be a tax-efficient process for closing down the company.
How do I close a company with Companies House?
If the route to dissolution is by way of a company application for striking-off, then Companies House will update its records following receipt of form DS01. This will move the company to the ‘proposal for strike-off’ stage. If no objections are received, Companies House will dissolve the company two months from the date specified on the advertised notice.
When a company is being closed following a liquidation process (solvent or insolvent), the Liquidator is responsible for filing the final account with Companies House which commences the dissolution process.
What are the tax implications of closing a limited company?
For shareholders, this will depend on the company’s solvency and their personal tax position.
Where a company is insolvent, generally it is expected that shareholders will not receive a return. In this scenario, shareholders may be able to claim capital loss relief on the cost of the investment.
Another consideration may be sideways relief. This will depend on the type of investment and advice should be sought from a professional tax advisor in this regard.
Where a company is solvent, shareholders will be receiving a return on their investment which will be subject to Capital Gains Tax as a Liquidator’s distribution is capital and not income. Tax planning for both the company and shareholders is, therefore, an important step in planning for an MVL.
How to pay the least tax closing a limited company
Generally, shareholders will only receive a return on their investment in an MVL. As a Liquidator’s distribution is capital and not income, it is subject to Capital Gains Tax. Subject to the shareholder’s personal tax position, this can be favourable compared to income tax.
In addition, further tax savings are available if shareholders qualify for Entrepreneur’s Relief. This reduces the Capital Gains Tax to 10%.
An MVL can, therefore, be a very tax-efficient process to close down a company.
Closing a limited company that has never traded
Generally a company application for striking off would be appropriate when a company has never traded. This is because it is likely to have no assets and no current or contingent liabilities.
If the company does have outstanding liabilities but has never traded (i.e. initial loan), then liquidation may be an appropriate process to close the company. A company application for striking-off could also be considered.
If the directors have any doubts regarding current or contingent liabilities, they should seek professional advice.
Can you close a limited company and start a new one?
No automatic legal provisions are preventing a director or shareholder of a closed company starting up a new company. However, if the closed company went through an insolvency process, then there are certain provisions within the Insolvency Act 1986 that the directors should be aware of.
Section 216 of the Insolvency Act 1986 deals with the re-use of a prohibited name. A prohibited name is the name of a liquidated company. If you are a director of a company, at any time in the 12 months before it goes into insolvent liquidation, you are restricted for five years from being a director of, or directly or indirectly being concerned in or taking part in the promotion, formation or management of a company with the same or similar name to the liquidated company. This same or similar name is known as a prohibited name. To be a director of a company known by a prohibited name, the director must obtain permission from the Court or satisfy certain legal requirements. Failure to do so can result in personal liability for the new company’s debts.
There are also timing considerations and whether the closed company continued to trade whilst insolvent. If it did and this was to the detriment of creditors, then the directors could be personally liable for the additional liabilities incurred in the relevant period.
An Insolvency Practitioner will also investigate the directors’ conduct for the purpose of submitting information to the Insolvency Service’s Director Disqualification Unit. If there has been unfit conduct, the director may be restricted from acting as a company director for a specific period. This is known as a disqualification order or undertaking.
This area of insolvency and company law is complex and brings with it serious risks and potential liabilities to directors. It is therefore strongly recommended that directors obtain professional advice when closing down a company. This may be from an accountant, solicitor or Insolvency Practitioner who should be qualified and have the relevant expertise.
How much does it cost to close down a limited company?
If the directors are applying for the company to be struck off, Companies House charges a fee of £10.
If the directors are pursuing liquidation, then this will be more costly. Comparably, MVLs are not as costly as CVLs. This is due to the additional investigation work required by a Liquidator in a CVL.
MVLs can start from £1,000 plus disbursements plus VAT.
CVLs can vary due to the nature and complexity of the case. Most Insolvency Practitioners offer a free initial consultation. At which, the Insolvency Practitioner should be able to provide an estimate of fees and disbursements together with any additional expenses. Generally, fees of £5,000 are charged to complete a simple no-asset CVL.
With appropriate professional advice, closing down a company can be a straightforward legal process. However, this will be heavily dependent on the company’s circumstances and financial position.
A company application for striking-off is a quick, simple and cost-effective solution but it is only available in very specific circumstances.
If a company has net assets over £25,000, then a Members’ Voluntary Liquidation could be a tax-efficient process for shareholders to receive a company’s surplus assets.
If the company is insolvent, then it is vital that directors obtain professional advice from an Insolvency Practitioner at the earliest stage.
If the company or its business cannot be rescued as a going concern, then a Creditors’ Voluntary Liquidation may be an appropriate procedure to close down the company.
Why Approved Recovery?
Only an authorised and licensed Insolvency Practitioner may act as Liquidator of a company. Many IP’s offer a free initial consultation and Approved Recovery are no different. Approved Recovery specialises in providing Members’ Voluntary Liquidations to small companies nationwide.
We service trading, contractor, consultant, and dormant companies. We also have experience in dealing with special purpose vehicles and corporate group simplification. We offer a simple Members’ Voluntary Liquidation service called Solvent Solutions.
Contact us for a free no obligation consultation.