Your company could close for multiple reasons, and how you do so will mostly depend on that company’s solvent position. Depending on that position, you could be choosing to close the company before creditor pressure forces it into liquidation, or if it has come to the end of its useful life. You should understand the potential signs of insolvency and what to do if they’re present.
This guide will outline how you can go about closing both solvent and insolvent companies.
Is your company solvent or insolvent?
Whether your company is solvent or insolvent will have a large bearing on how you’ll close it. While it might seem counterintuitive to want to close a healthy, solvent company, you might wish to do so in the following situations:
- You and the other directors wish to retire without succession, or if you don’t plan to sell the company
- The market has changed and made the company unviable in the long term
- The company is one of several undergoing a restructuring or reorganisation
An insolvent company is likely to find itself in a less desirable position:
- It cannot repay its liabilities as and when they fall due
- The value of its liabilities exceeds the value of its assets
- The company is under pressure from creditors, and they may have taken legal action against the company
- Formal recovery arrangements or restructuring the company have either failed or aren’t feasible
Directors should always be aware of their company’s solvent position and take the action necessary to either mitigate the situation or to close it.
If you need help deciding what the best option would be for your company, speak to a licensed and regulated insolvency practitioner. These professionals can assess your company’s situation and help you decide the best route forward. They are the only people qualified to enact formal procedures to rescue or close the company.
How do I know if my company is insolvent?
If you’re unsure whether your company is insolvent, you can look out for several warning signs. These can include:
- Unbalanced cash flow or balance sheet
This happens when the company cannot pay its liabilities as and when they fall due, including National Insurance, VAT, and PAYE, or the company’s liabilities exceed the value of its assets, including the cash in its bank account.
- Legal action against the company
Creditors have filed legal action to recover what your company owes. This can come as a County Court Judgment (CCJ), which can negatively affect the company’s credit file if you don’t address it within the time specified in said judgment. Creditors can even pursue a winding-up petition and force the company into compulsory liquidation.
How to close a solvent company
How a solvent company might close depends on the value of its assets:
- Dissolution
If the company has no outstanding debts, you can close it through dissolution. This strikes the company off the Register of Companies and ends its legal existence.
For this to be viable, the company must have:
- Not traded within the last three months
- Not undergone a name change
- No prosecutions or disqualifications
- A finalised pension scheme
While directors of insolvent companies can attempt a dissolution, the process is not intended for them. Creditors can apply to restore the company for up to six years after the dissolution if they’re owed money.
- Solvent liquidation
A solvent, Members Voluntary Liquidation (MVL) may be the best way forward if the company has more than £25,000 in cash and assets. It can be a more cost-effective and tax-efficient way to close a solvent company, potentially allowing you as a director to take advantage of Business Asset Disposal Relief (BADR).
How to close an insolvent company
Closing an insolvent company will have added urgency, and depending on the amount of debt and the severity of the creditor action, you may have fewer options.
Those options may include:
- Formal repayment arrangements
It might be possible to repay an affordable portion of the company’s debts through a formal repayment process. One of the most popular is a Company Voluntary Arrangement (CVA). In this formal, legally binding arrangement, the company repays an agreed amount to its unsecured creditors over a period of around five years. The company continues trading for the duration, retaining its place in the market. Upon the arrangement’s completion, any remaining unsecured debt is written off. - Company restructuring
Where repayment may not be feasible, or there’s a chance of achieving a better outcome than if the company were put straight into liquidation, the insolvency practitioner may suggest administration. They’ll assess the company’s finances and suggest the process if it could potentially return the company to a profitable state. - Insolvent company liquidation
Where recovery is unlikely, closure may be the company’s best option. This can be achieved by entering a Creditors Voluntary Liquidation (CVL). Doing so means the insolvent company will close through an orderly, formal process. It draws a line under the insolvent company and its debts, leaving you, as its director, free to start afresh.
To summarise
A limited company’s solvent position is a determining factor in how that company could close. As the director, you should always be aware of your company’s solvent position. Look out for legal action or an inability to maintain its balance sheet. Speak to a licensed insolvency practitioner if you need clarification on the best course of action for your company. If it is solvent, it can close through a dissolution or through a solvent Members Voluntary Liquidation. Insolvent companies should close via a Creditors Voluntary Liquidation before creditor action risks forcing it into compulsory liquidation.