A company may need to be closed for any number of reasons. Sometimes it has reached the end of its natural life and needs to cease to trade. Sometimes directors or shareholders can fall out and the company can’t find a way to continue in the same direction. Occasionally a company is facing financial difficulties that can’t be overcome and has to move into formal insolvency.
In this article, insolvency and recovery solicitor Eleanor Stephens looks at the various options available to both a solvent and insolvent company when it needs to come to an end. We consider the practicalities of what is involved, how long it takes, who needs to be involved and how much each option costs. We also look at the consequences of not closing the company down in the correct way.
Contents:
- Solvent company – the options
- Dissolution of a company
- Members voluntary liquidation (MVL)
- Insolvent company - the options
- Creditors’ voluntary liquidation (CVL)
- Compulsory liquidation/winding up
- What are the potential consequences of improperly closing a company?
- Do I need to keep any company records after dissolution or liquidation?
- How our insolvency solicitors can help
Solvent company – the options
There are significant differences in closing a company that is solvent compared to an insolvent company and the impact on directors and their duties will be different depending on the option you choose. Below we discuss the options available to a solvent company that is looking at winding-down operations.
Dissolution of a company
If the business purpose no longer exists, or if the shareholders and directors decide they want to pursue other avenues and there are no complications of any kind, then the easiest and most cost-effective way to close a solvent company is to dissolve it.
The company must cease to trade, deal with all of its assets and liabilities, close down all company matters and apply to dissolve the company at Companies House. Any company can do this. There are certain criteria that must be met otherwise Companies House will reject a claim and any fraudulent purpose for closing down the company could lead to criminal charges being brought against the directors.
This option should only be used in very simple cases. Overall, this is likely to take around 2 months once the application is made to Companies House and the company must have ceased to trade for at least 3 months prior to that.
As long as the company has dealt with all of its assets and creditors, there should be no come back on the directors but they must comply with all of the requirements under the Companies Act 2006 or they may be liable for an offence – for example, of failing to notify relevant persons prior to dissolution.
If any property has not been dealt with prior to dissolution, that property will be deemed to be ‘bona vacantia’ and will pass to the Crown. Any creditor who feels they are still owed money can apply for the company to be restored in order to make a claim.
Members voluntary liquidation (MVL)
This is a method of winding up a solvent company where there are issues to be dealt with, such as assets to be collected, people to be paid, leases to be dealt with etc. The company must be solvent and the directors must sign a statutory declaration of solvency for this process to be used.
A liquidator is appointed to deal with everything within the company to wind it down effectively. They will then close the company at Companies House. This can be a good way of dealing with a solvent wind down where there are several shareholders and directors and there is a potential for conflict or difficulties.
The costs of the liquidator must be met, and depending on what they need to do, this can be several thousand pounds which will need to be agreed with the liquidator. The time this takes is dependent on how long it takes the liquidator to get in all of the assets, sell them and distribute them.
Once in liquidation, the directors hand it over to the liquidator. Because the company is solvent, there is no potential for later claims against the directors by a liquidator or for director disqualification. There are strict penalties if directors file a false declaration of solvency.
Insolvent company - the options
When a company is insolvent the options to wind it down differ somewhat. Once a company is insolvent, then the primary focus needs to be on the creditors of the company rather than the shareholders. The closure of the company is subject to much greater legislative scrutiny.
If a company is insolvent and has no reasonable chance of recovery, the directors have a duty to close the company down using one of the insolvent winding-down processes as soon as this becomes clear.
There are various duties and responsibilities that the directors have prior to an insolvent winding up, and a breach of these can lead to personal liability for directors, as well as potential disqualification for misconduct. The options for an insolvent winding-down of a company are:
Creditors’ voluntary liquidation (CVL)
A Creditor’s Voluntary Liquidation (CVL) is a procedure by which the company or directors of an insolvent company formally place the company into the liquidation process to cease trading and wind the company down. You need at least 75% of the shareholders in value to agree on this option.
A liquidator will be appointed by the company following the resolution, and this decision will then be put to the creditors to vote on. The creditors may decide not to vote on the same liquidator if they have specific objections, but this is unusual. All liquidators are independent, no matter who they are instructed by, and they must act in the interests of all creditors, rather than the directors or shareholders even if put in place by them.
Like a solvent liquidation, the liquidator will collect in the assets of the company, and then pay creditors in accordance with their legal priority, starting with secured creditors. Shareholders are last in the queue and bearing in mind the company is unable to meet all of its debts, it is very rare for creditors to be paid in full and even rarer for shareholders to get any return.
The time frame for this, as with all processes, depends on how many assets there are to gather and how difficult or not this is to achieve.
The cost of a CVL will very much depend on what the liquidator has to do, as their main expenses will be the costs of gathering assets and distributing them. They may also need to take proceedings if necessary to recover assets. Costs will be taken from any realisation of assets but will need to be discussed with the proposed liquidator in advance, who may require payment on account.
As soon as a liquidator is appointed, the directors have no further powers and step down. The liquidator takes over. As mentioned above, in an insolvent liquidation, directors are open to proceedings against them personally if a liquidator thinks that anything untoward has happened in the company, and they can go back over several years. For example, if money is moved out of the company without any benefit to the company or if a creditor is paid in preference to others.
Directors are also open to disqualification for up to 15 years for misconduct if the Insolvency Service investigate and bring a claim against them.
Compulsory liquidation/winding up
This is a similar process to a CVL , but is initiated by a court application known as a winding up petition. It is a process which can be brought by a creditor of the company, as well as by the company itself. Any creditor owed over £750 in undisputed debt may present a petition for the winding up of a company.
The company or directors may also present a petition and this is a good option where shareholders are not in agreement regarding a CVL.
A petition is presented to the court, and a hearing date is set. If there is no legitimate objection, then the court will put the company into liquidation in due course.
As soon as a petition is presented (even if not ordered in court), the company will lose access to its bank accounts and should not move any assets out of the company. This often causes the immediate cessation of trade, as suppliers and staff cannot be paid unless using third party funds.
Once the winding up order is granted by the court, the Official Receiver is put in place, but if there are any assets in the company to deal with, they will usually appoint a liquidator to deal with the winding up in their place.
Thereafter the process is generally the same as with a CVL and MVL above.
The costs will be the initial costs of the petition and the Official Receiver’s deposit, which are a few thousand pounds at the time of writing. Any additional costs of the liquidator will come out of recoveries by them, which may include claims against directors personally if appropriate.
The position is the same as with a CVL but the timetable for a compulsory liquidation is not as easy for the directors to control as it is court driven. Directors’ liabilities remain the same as with a CVL.
What are the potential consequences of improperly closing a company?
Not following the correct procedures to dissolve a company can have serious and far-reaching consequences, which include:
- Time and expense: if a company is not dissolved correctly, it may have to be restored which will involve a court process which may be lengthy, convoluted and expensive. This is especially true if assets which have passed to the Crown need to be recovered.
- Tax consequences: if a company has not been properly closed down then tax liabilities can continue to accumulate which could lead to large fines for failure to file tax returns and penalties for non-payment.
- Legal action: if shareholders, creditors or other parties believe they have suffered a loss as a result of the improper dissolution of the company, then they may bring legal action against the company and potentially its directors which is likely to result in expensive legal fees and possible personal liability for directors.
- Personal liability: directors can face personal liability in a number of areas following the improper dissolution of a company. They can be held personally liable for any debts of the company which were not fully settled prior to dissolution. In an insolvency situation, they can also be found guilty of wrongful or fraudulent trading prior to dissolution. They may also be guilty of breaching their directors’ duties by not following the correct legal procedure for the dissolution of the company and face penalties, disqualification or even prison.
- Reputational damage: directors who have been involved with an improperly dissolved company can face reputational damage and a loss of trust from future business partners, investors and employers.
Do I need to keep any company records after dissolution or liquidation?
Yes, it is prudent to keep all records for at least six years after the date of dissolution irrespective of whether the dissolution was solvent or insolvent. This is because companies can be restored to the register for a period of six years after dissolution.
Some company records should be kept for a period of at least 10 years, these include minutes of board meetings and resolutions.
Certain regulated industries may have different rules regarding record retention post-dissolution so this should also be checked before deleting or destroying any company records.
How our insolvency solicitors can help
If you think that your company needs to be closed, then get in touch with our insolvency solicitors as soon as possible, and we will discuss the potential options with you. A company that is facing financial difficulties will have more options the sooner the difficulties are addressed, and may be able to recover and return to profit if the right action is taken quickly.
The longer the issues are left, the fewer the options available and the higher the risk to the directors personally. As we have seen above, the consequences of not properly closing a company can be serious and can affect directors personally.
