With markets and consumer habits constantly changing, businesses that were once viable and successful can find themselves losing market share, and closing the company would be one of their options.
Why Would Directors Close a Company?
While a downtrend in a once profitable market can lead to directors closing up shop, it is not the only reason to do so. Directors nearing retirement age might not want to pass the business on to anyone or lack a party to inherit it. Selling a company is an option for directors feeling it’s time to leave their industry, though they may find doing so difficult if the market is declining. As such, closing the company may be a better option.
While company closure is often linked to insolvency, the two aren’t mutually exclusive. Debt is often cited as a reason for company closure, but other reasons for directors wanting to close their company can include:
- Wanting to retire with no succeeding party.
- A change in circumstances.
- To seek employment elsewhere.
- As part of restructuring or merging multiple companies.
If the company is insolvent, closure may be the best way forward, limiting potential damage and creditor losses.
As a director, you should always be aware of your company’s solvent position. Signs of insolvency can include an imbalanced cash flow, the company struggling to repay its liabilities as and when they fall due, and legal action such as Statutory Demands or County Court Judgements (CCJs) filed against the company. If the company’s debts have reached such a level that repaying them is unrealistic, directors can voluntarily close the company rather than wait for the creditors to wind the company up.
Options for Solvent Companies
When considering closing a solvent company, directors might instantly think of dissolution. Dissolving the company is a viable option if directors want to close a company with little in the way of assets. Before dissolving, directors should ensure the company:
- Has no legal action filed against it.
- Has ceased trading for at least three months.
- Can settle all employment liabilities, including PAYE, outstanding wages, holiday pay, National Insurance Contributions and redundancy pay.
- Has filed all statutory returns to HMRC and Companies House.
- The company’s bank accounts have closed.
A dissolution isn’t the only way for directors of solvent companies to close. If the company has assets exceeding £25,000, directors can explore closing the company through a solvent Members Voluntary Liquidation (MVL).
Closing via a solvent liquidation means the company may qualify for Business Asset Disposal Relief (BADR), where its assets are sold, and the proceeds repay any creditors and liquidator’s fees. Any monies remaining are then distributed between the company’s shareholders.
For a relatively low cost, an MVL can be more tax-efficient and faster (both for cash release and funds distribution) than closing via dissolution.
Options for Insolvent Companies
Options are different for companies unable to repay their liabilities on time.
While insolvent companies can continue trading with the aid of formal repayment plans or additional restructuring, these solutions’ availability depends on the company’s suitability to see them through.
Directors wanting to draw a line under the insolvent company and its liabilities can do so via a Creditors Voluntary Liquidation (CVL). This process draws a line under the insolvent company’s debts by closing it in an orderly manner. All employees are made redundant, with all unsecured debt written off. Closing voluntarily can also ensure a more controlled entry into liquidation and a better return to creditors than if the company was closed via a winding-up petition.
Summary
If a company is no longer needed due to a declining market, directors wishing to retire, or the threat of insolvency looming, there are several options to close it.
Directors of solvent companies with more than £25,000 in assets can close via a Members Voluntary Liquidation (MVL), offering a faster release of funds and a more tax-efficient closure than a dissolution. Directors of insolvent companies past the point of recovery can close their company by entering a Creditors Voluntary Liquidation (CVL), providing a better return to creditors than if the company was forced into compulsory liquidation via a winding-up petition.