Winding up and closing down a company cleanly
While many business owners will implement succession plans to sell or pass their business to a new generation of owners, sometimes it is clear that you have reached the end of the road and the best decision is to call it a day and close the company. Having made this tough decision, you will need to plan the best approach to achieve this cleanly and cost-effectively before the final closure can be made official.
‘The economic health of the business and your reasons for closing a company will be crucial in determining the steps required’ comments Danielle Austin, a Corporate Solicitor at Geoffrey Leaver Solicitors. ‘It is also important to remember that aside from the legal requirements and implications involved, there will be practical steps for business owners and company directors to plan’.
If the company is solvent
If the company is solvent and able to pay its debts, the main options available to ensure a clean closure of the company are:
Striking off the company – While this is the easiest and cheapest option, striking the company off from the Register of Companies is subject to certain conditions. You can strike it off if you have not:
- traded or sold any stock or goods in the last three months;
- changed the name of the company in the last three months; or
- been threatened with liquidation and have no other impeding creditor agreements.
There are also certain notification obligations to fulfil, such as notifying HMRC, terminating employees and settling debts.
Members’ voluntary liquidation – This may be a more suitable option where you no longer want to operate your business, but you need to liquidate assets or pay off any debts. Usually, a declaration of solvency would need to be filed and this would include details of the company’s assets and liabilities, and it would need to be signed by the majority of directors. Other corporate formalities such as general meetings and issuing resolutions will also need to be attended to. In order for the liquidation to take effect, an authorised insolvency practitioner will need to be appointed as a liquidator.
If the company is insolvent
If, on the other hand, the company is insolvent and unable to pay its debts as they fall due, the following routes and implications should be considered:
- Creditors’ voluntary liquidation – When a company is unable to pay its debts as they fall due, the company directors may want to maintain some degree of control and choose to liquidate the company rather than wait for creditors to force a compulsory liquidation. Under a creditors’ voluntary liquidation, a determination needs to be made as to whether the company is cash flow insolvent (i.e. the business cannot meet its liabilities when they become due) or balance sheet insolvent (i.e. the business liabilities outweigh its assets). The advantage of choosing voluntary liquidation before the creditors instigate liquidation is that directors can choose their own liquidator and while assets will usually be used to pay off debts, the aim will be to minimise creditor losses rather than eliminate them completely. Similar to a members’ voluntary liquidation, there are corporate resolutions and filings that will need to be completed beforehand.
- Compulsory liquidation – If a company has accumulated debts exceeding £750, shareholders can agree to the directors applying to the court for a winding up order. This route involves more resolutions, completion of a winding up petition, public announcements and fees for both the courts and legal representation at hearings. However, compulsory liquidation is often initiated by creditors who have not been paid. Once this happens, company directors will end up with very little control over the liquidation process and protecting the creditors will become the priority.
If a company has had to go into compulsory liquidation or creditors’ voluntary liquidation, there will be implications on what directors or owners must do during the liquidation process and going forward. For example, directors must co-operate with liquidators’ requests and continue to abide by their fiduciary duties.
Post liquidation, there is a five-year ban on forming, managing, or promoting a business with a similar name and depending on decisions made during the liquidation process, directors may be banned from being a director for a certain period of time. It is, therefore, important to look beyond the winding up of your company and consider the directors’ future aspirations.
Aside from the formal process of closing down a company, there are other practical steps to consider and action. The complete list will depend on the nature of the business in question but, generally speaking, here are some of the ‘to do’ tasks we remind clients about:
- filing any due accounts;
- ensuring any assets belonging to the company, such as property or monies in a bank account, are dealt with before the company is dissolved as otherwise these will become “Bona Vacantia”;
- consider if trade marks need to be relinquished;
- pay out any shareholder or director expenses;
- update all corporate housekeeping; and
- keep records for six years
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This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.