JoshIf a time comes when a company needs to close its doors, directors should be aware of their options. These options will differ depending on the company’s circumstances, including whether it’s solvent or insolvent, arguably the most significant factor in determining which path the company should take.
Here, we will discuss those different options and when they would be appropriate for a UK-based company.
Closure options for insolvent companies
If a company is insolvent, it can’t pay its liabilities as and when they fall due. Consequently, they could find themselves under immense creditor pressure. While company directors may have options to rescue the company if they act quickly enough, that might not be doable if they’ve left it too long or the company’s level of debt doesn’t allow it.
Equally, with all the added creditor pressure, directors might not want to continue trading, preferring to close the company and draw a line under its unsecured debts.
- Creditors Voluntary Liquidation (CVL)
A Creditors Voluntary Liquidation (CVL) allows an insolvent company to close in an orderly manner. The directors can initiate the process by contacting a licensed insolvency practitioner who will oversee it. During the liquidation, all creditor pressure and legal action against the company stops. Once the procedure concludes, the company ceases to exist, and the directors can walk away. - Compulsory liquidation
Compulsory liquidation is considered the less desirable option for insolvent companies and one that creditors can force upon them. The process begins when a creditor files a winding-up petition with the court, which they can do if the insolvent company owes them more than £750. If the court finds the company is insolvent, the petition becomes a winding-up order. The company bank accounts freeze, making trading impossible.
Closure options for solvent companies
If the company is solvent, there might be less pressure on the directors, but they might wish to retire with no successor, or the company might have served its purpose and has no real future.
- Members Voluntary Liquidation (MVL)
An MVL is a formal closure option for solvent companies with assets exceeding £25,000. Closing via an MVL rather than through dissolution allows directors to claim Business Asset Disposal Relief. Like a CVL, the process is overseen by a licensed insolvency practitioner and can be more tax-efficient for shareholders and directors than simply dissolving the company. The process can also be quicker than a dissolution, with funds sometimes distributed within seven days.
- Dissolution
A dissolution is a closure process for companies without debts, striking off the company from the Register of Companies at Companies House and ending its legal existence.
The company must have ceased to trade, and can’t be engaged in any ongoing insolvency proceedings or have legal action against it for at least three months before it can apply for dissolution. While directors can file to dissolve an insolvent company, the dissolution is advertised, and creditors can object if they haven’t been paid. Additionally, creditors can reverse a dissolution for up to six years’ time afterwards if more liabilities come to light.
To summarise
In the UK, a company’s closure options will depend on its financial position, including whether it’s solvent or insolvent. In the former case, directors can dissolve the company via dissolution or close via a Members Voluntary Liquidation (MVL) if it has sufficient assets or would benefit from Business Asset Disposal Relief. Directors of insolvent companies should seek professional advice from a licensed and regulated insolvency practitioner, where they can discuss the available options. If closure would be the best course of action, you should close the company through a Creditors Voluntary Liquidation (CVL). Failing to take decisive action means creditors may force the company into compulsory liquidation.