Deciding to close a limited company is a big decision for any director. There is a lot to consider, including the will of its directors, including yourself, the current market and customer habits, and most importantly, the company’s solvent position. This will have a bearing on how you’ll close the company if you wish to close the company after considering all these factors or have to due to insurmountable financial challenges. But how can you tell if a company is solvent or insolvent? How do you go about closing one? And what can happen if you don’t do anything at all? Solvent and insolvent closure. What’s the difference? Before deciding on how you’ll go about closing your company, you must first determine whether it is solvent or insolvent.
A company is solvent if it has sufficient assets to repay its liabilities as and when they fall due, including both physical assets and cash in its bank account. Even if the company is solvent, you might still want to close it due to:
- Directors retiring without wanting to continue the business.
- The company has come to the end of its useful life, or a change in the market or customer habits means that it won’t be viable going forward.
- The company needs to close due to a large-scale reorganization of several companies as part of a merger or buyout.
Your company could be insolvent if:
- It can’t pay its bills when they fall due.
- Its liabilities exceed the value of its assets.
- The company’s creditors have filed or are threatening to file legal action.
- Attempts at repaying the company have failed or wouldn’t be feasible, and there is no viable way to restructure the company back to a profitable state.
You should always be aware of your company’s solvent position, as these will have a bearing on the available processes if you do decide to close it.
What happens if I don’t act in insolvency
As a company director, you should always act in that company’s and its creditors’ best interests. If your company is insolvent, ignoring the problem won’t make the problem go away. In fact, it will only worsen the situation.
Ignore it for long enough, and your creditors could even pressure your company to repay what you owe them. This pressure could start as repayment reminders via phone, email, or post. Failing to respond to these means the company’s creditors could take further action.
- County Court Judgments and Statutory Demands
County Court Judgments (CCJs) and Statutory Demands can negatively impact your company’s credit rating if you don’t repay the amount specified or have it set aside before the associated deadline. CCJs can be especially damaging, staying on the company’s credit file for six years.
Continuing to ignore these means you could receive visits from debt collectors and even bailiffs, who will aim to collect funds or assets to settle the outstanding amount.
- Forced closure through a winding-up petition
If your company owes a creditor more than £750 and you continue to ignore their recovery attempts, they can apply for a winding-up petition. If this petition is filed successfully, it becomes a winding-up order, forcing the company into compulsory liquidation, with the company’s bank accounts freezing and the company forced to close.
Insolvent company closure
If your company is insolvent, closure may be just one of several options. Whether these are suitable depends on your company’s circumstances, including the level of debt.
- Repay debts at a tailored, affordable rate
If your company has a viable business model and could be profitable without its debts, it could attempt to repay its debts in affordable instalments. This can be done through a Company Voluntary Arrangement (CVA). The process usually lasts five years, with the company’s unsecured debts consolidated into a single monthly repayment tailored to the company’s affordability. The process allows your company to continue trading while repaying its debts, which can help to maintain its public image.
- Restructure the company
If repayment alone isn’t a feasible recovery option for the company, then administration might be the best option. Administration sees an insolvency practitioner investigate the company and its circumstances while exploring potential routes back to profitability. This may include the sale of the company as a going concern. Administration is a temporary process, often followed by another insolvency procedure.
- Closing the company down
Sometimes, the company’s debts can be of such a level that recovery isn’t feasible. In this case, you can voluntarily close the company and draw a line under its debts. You can do this by entering a Creditors Voluntary Liquidation (CVL). This process closes the company in an orderly manner, drawing a line under its debts and allowing the directors to start afresh if they aren’t subject to any disqualifications or restrictions as a result of their directorship.
Solvent company closure
If your company is solvent, you have fewer options for closure but also less pressure. Which of these options is best for your company depends on the value of its assets:
- Striking off through dissolution
Dissolution is often the default option for directors looking to close a solvent limited company. The process strikes the company off the Register of Companies at Companies House, ending its legal existence.
For a dissolution to go through, the company must meet the following criteria within the three months leading up to the application:
- The company has ceased trading for at least three months.
- It has no outstanding debts.
- It hasn’t undergone a name change.
- It isn’t subject to any prosecutions or disqualifications.
- The pension scheme is finalized.
- There is no administrative receiver appointed to the company.
Dissolution is not suitable for insolvent companies. If a creditor has a valid reason to do so, they can apply to restore a previously dissolved company for up to six years afterwards should they have a valid reason to, such as if the company owed them money before it was struck off.
- Solvent liquidation
Companies with assets exceeding £25,000 may be eligible to close through a Members Voluntary Liquidation (MVL). This can be a cost-effective and tax-efficient way to close a solvent company, potentially allowing you to take advantage of Business Asset Disposal Relief.
To Summarize
How you can close your limited company greatly depends on its solvent position. As a director, you should always know whether your company is solvent or insolvent. If the company has enough funds and assets to cover its liabilities as and when they fall due, you can close by striking the company off through a dissolution or through a solvent MVL if it has sufficient funds. Depending on an insolvent company’s circumstances, it may be possible to repay the debts in affordable instalments on a monthly basis through a CVA, undergoing restructuring through administration, or close voluntarily through a CVL before the creditors use a winding-up petition to force it into compulsory liquidation.
