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. Often directors or shareholders can fall out and the company can’t reasonably continue in the same way. Occasionally a company is facing financial difficulties that can’t be overcome, and moves into formal insolvency.
In this article, Insolvency and recovery solicitor Eleanor Stephens looks at the various options available to a company when it needs to come to an end, both solvent and insolvent. We consider the practicalities of what is involved, how long does it take, who needs to be involved and how much each option costs.
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Solvent company options
There are significant differences in closing a company that is solvent compared to an insolvent company. The directors’ duties and ramifications for directors are different depending on the option you choose.
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 the assets and liabilities first, close down all company matters, and apply to dissolve the company at Companies House. Any company can do this. However, there are certain criteria that must be met, or Companies House will reject a claim and any fraudulent purpose can lead to criminal offences for directors.
This method 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. It must have ceased to trade for at least 3 months prior to that however.
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
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 be agreed with the liquidator. The time frame this takes is dependent on how long it takes the liquidator to get in all of the assets, sell the same, and distribute them.
Once in liquidation, the directors hand 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. However there are strict penalties if directors file a false declaration of solvency.
Insolvent company options for winding down a company
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, and ending a company must be completed with this in mind, and is therefore subject to much more legislative scrutiny.
If a company is insolvent and has no reasonable chance of recovery, the directors are under a duty to close the company down via one of the insolvent methods as soon as this is clear.
There are various duties and responsibilities that the directors have prior to an insolvent winding up, and breach of these can lead to personal liability for directors, as well as potential disqualification for misconduct.
Creditors’ voluntary liquidation
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 up. You need at least 75% of the shareholders in value to agree this option.
A liquidator will be appointed by the company following the resolution, and this will then be put to the creditors for vote. The creditors may decide not to vote on the same liquidator if they have specific objections, but this is not usual. 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 priority under the legislation, starting with secured creditors. Shareholders are last in the priority order, and bearing in mind the company is unable to meet all of its debts, hence its insolvency, 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 the main costs will be their costs of gathering in 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 more 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 from the company without being for the benefit of 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.
Compulsory liquidation/winding up
This is a similar process to CVL above, 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 to a CVL.
A petition is presented to the court, and a hearing set, and 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 it’s bank accounts and should not move any assets 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 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 CVL above. The timetable for a compulsory liquidation is not as easy to control for the directors as a CVL as it is court driven, which must be considered. Directors’ liabilities remain the same as with a CVL.
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 problem issues are left, the less options available on the table, and the higher the risk to the directors personally. Our experienced solicitors can look at the best options with you to resolve your issues, whether you are solvent or insolvent. We can also put you in touch with suitable insolvency practitioners for a no obligation discussion if appropriate.
