The law on closing down a company
Although a limited company can be established in a matter of hours in the UK, and for as little as £50-£100, closing down a limited company is considerably more complex. The best method applicable to closing down a limited company depends on whether that company is solvent or insolvent (i.e. whether it still has outstanding debts).
If you are unsure how to close down your company, or what method to use, it is advisable you speak to a professional (this may be an insolvency practitioner or a solicitor specialising in the field). We can certainly assist with the process and legal advice if you are unsure, worried or don’t want the hassle. Advice is recommended where you are concerned about any persona liabilities.
Closing a Company where there are outstanding debts
If the limited company has outstanding debts then it may be applicable to consider liquidation as a method of closing the company. Liquidation involves a ‘liquidator’ being appointed to wind up the affairs of a company. It does not necessarily mean however, that all creditors of the company will be paid, even once the company ceases to exist.
Timing can be very important if you are considering closing a company. Continuing to trade on when the company is insolvent creates significant potential risks. It s also worth checking whether you, as director or even shareholder have provided any personal guarantees or indemnities. Closing a company in this situation may trigger your liability to pay in such circumstances.
It may be that you owe the company money via a directors loan or in some other format. Again, don’t assume that becuase the company is liquidated that you will not have to pay part or all of that money back.
There are three types of liquidation that are used to close a limited company.
Voluntary liquidation of company by shareholders
This is where the company shareholders decide to put the company into liquidation themselves. This is used where the company has enough assets to pay off all its outstanding debts. The shareholders appoint and pay a liquidator themselves.
Creditors’ Voluntary Liquidation
This is similar to the scenario above, except that the company will not have enough assets to pay off its debts. With this method it is the creditors who appoint and pay the liquidator. If the company has any assets they may pay the liquidator out of these.
This is where the court serves an order for the company to be closed. This is usually because someone who the company owes money to has petitioned the court. The court will then appoint and pay a liquidator, although they will recover these costs from the sale of any assets which are still owned by the company. It is possible for the directors of the company to apply for an order on behalf of themselves or the shareholders (often because they do not want to, or are unable to, fund the cost required for a voluntary liquidation).
If your limited company is unable to pay off its debts it should cease trading, otherwise the directors may be liable for the company’s debts. The company is said to be insolvent. At this stage, there may be a possibility that a negotiation between the company and its creditors (or the people the company owes money to) could mean that the company can continue trading. It is important that you speak to a professional before assuming this will always be the case.
Closing a company which has no debts
Dissolution is a cost-effective, easier method of closing down a limited company where that company does not have any outstanding debts. (Please note that in certain situations it can also be used to close down companies which are insolvent).
Where a company wants to close down using this method, the first step is for that company to cease trading. All the money the company owes, whether to third-parties or to the directors/shareholders, should be repaid. The company should then apply to HM Revenue & Customs in order to cancel its VAT registration. The next step is for the company to inform its staff, issuing them with a formal notice and sorting out their final payroll. Although the directors of the company may wish to resign at this point, one director should remain employed in order to sort out the closure.
The next step in dissolution is to prepare a final set of accounts which will need to be submitted to HM Revenue & Customs. As this may not be practical to do straight away, you will need to contact the HMRC and inform them that the final accounts will be sent shortly.
It is worth noting that the company cannot close down until its corporation tax has been paid, and any assets (money/equipment) left after all the debts have been paid is distributed amongst the shareholders.
Once these requirements have been complied with then the directors can complete an application to Companies House to have their company struck off. In order to do this, the company must have complied with the following additional requirements: it must not have traded within the last 3 months, the company name must not have been changed in the last 3 months, the company must not be the subject of any legal proceedings and the company must not have made a disposal for value of property or rights. If these requirements are satisfied, the striking off application (DS01) can be completed, with the majority of the directors signing it, along with submitted a £10 fee Companies House.
If you need advice on closing your company, contact me for cost effective and practical help and assistance. I’ve helped many companies shut down in the best way possible, protecting the directors and shareholders and where necessary liaising with Insolvency Practitioners.
Other good webpages on this topic for further reading :-
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