Companies can close or come to an end for a variety of reasons. Maybe you own a business, and wish to retire? Perhaps your company isn’t doing well financially, and your creditors wish to close it down so they can recover the debts you owe. Or perhaps the company shareholders want the company to be liquidated so that they can extract value from the company’s assets. Here we’ll be giving an overview of company closures.
- How a company can close or end, whether voluntarily or involuntarily
- What does dissolving a company mean?
- The key differences between dissolution, winding up, striking off, liquidation and insolvency when a company is closed
- Striking off a limited company to close it
- Putting a limited company into administration
- Liquidating a limited company to close it
- Striking off an LLP
- Members’ voluntary liquidation (MVL)
- Changing your company to ‘dormant’
How a company can close or end, whether voluntarily or involuntarily
The most common way for a solvent company to end is for the directors to file an application for the company to be dissolved. Another way a solvent company can be closed is via a members voluntary liquidation, in which the company’s assets are liquidated and it is wound up. Companies House may end a company’s life by striking it from the Register where it believes that the company is no longer in business and it has failed to make filings or has no directors.
If a company is insolvent, then one possibility for closure is a creditors’ voluntary liquidation (CVA), in which the directors of a business voluntarily ask for the company to be liquidated and any assets used to pay creditors. An alternative to a creditors’ voluntary liquidation is a compulsory liquidation instigated by creditors, in which they petition the court for a company to be wound up and its assets realised for their benefit.
Insolvent companies can also be put into administration, where a buyer will be sought for the company or its assets. If the company is sold as a going concern, it won’t close down, but if its assets are sold, then any remaining company property will be liquidated and the company wound up.
Companies can also be made dormant, in which they cease trading for a time, although the directors will still have filing requirements during the dormancy period.
What does dissolving a company mean?
Dissolving a company means that it is closed down and removed from the Register of Companies at Companies House. If you decide you no longer need your company, this is a relatively quick and painless way of ending its life.
Once companies have been liquidated, they are also dissolved at the end of the liquidation process.
The key differences between dissolution, winding up, striking off, liquidation and insolvency when a company is closed
Dissolving a company, or company dissolution, otherwise known as striking-off, means that a company is closed down and its name removed from the Register at Companies House. The company then ceases to exist as a legal person. These terms are usually used when the process involves a solvent company.
In contrast, where a company is insolvent, a process called liquidation is used to realise the value of the company’s assets, and the company is then wound up so that it ceases to exist. Technically, the company is also dissolved at the end of this process.
Striking off a limited company to close it
Striking off and dissolution are part of the same process to end a company’s existence, although they are technically different stages. A company only technically ceases to exist once its name has been struck off the Register of Companies.
A directors’ application for dissolution can only be used if a company is solvent, and can’t be used if, during the past three months, it has traded, changed its name, or engaged in any activity other than to prepare for the company to be struck off the Register.
Prior to a company being dissolved, anyone who has had dealings with the business, such as employees, HMRC, bankers and accountants, plus creditors and suppliers will need to be informed, so it can be a cumbersome process if the company has had a complicated trading history. A set of closing accounts, VAT and tax returns, and formal PAYE returns will have to be prepared prior to closure. All debts will need to be paid in full, and any assets sold.
Before you decide to end your company therefore, you need to make sure that you have a full picture of all the company’s liabilities, including any outstanding or future tax bills, and any contingent liabilities like guarantees. You also need to ensure that you make a list of all the company’s assets, as these will need to be transferred out of the company’s name before the company is dissolved, otherwise these will belong to the Crown.
Any contracts the company has entered into, whether as a supplier or a purchaser, should be looked at to see whether they will be terminated, novated or assigned, and you should decide how any capital remaining in the company will be returned to its shareholders.
To make a formal application for a striking off, the company will complete form DS01 and file it with the Registrar of Companies House. In the application, the directors will make a declaration that the company is solvent and that the other conditions for a dissolution have been met. Because a striking off means that the company ceases to exist, all those who may have an interest in the company have to be notified prior to the application that this is the company’s intention. In addition, copies of the application have to be sent to shareholders, directors, creditors and employees.
A company cannot be struck off if it is already the subject of other proceedings that have not yet concluded, such as a company voluntary arrangement, or a winding up.
The Registrar has a discretion and not a duty to strike a company’s name off the Register, and third parties may object to the company being struck off, for example if there are ongoing legal proceedings.
Once Companies House has received the application to strike off a company, it will publish the relevant form on its website, and place a notice in the Gazette to notify interested parties who may raise an objection. The company will then be struck off at least two months following the date of publication, after which point it will cease to exist.
Putting a limited company into administration
If your company is not able to pay its debts, you may choose to put it into administration. Once you have made a valid application, your company will be protected from actions from creditors who wish to recover their debts, or seek to have your company wound up.
To put your company into administration, you will need to appoint a professional administrator who is a licensed insolvency practitioner, to whom you will cede control of the company and its assets. The administrator may decide to make employees redundant, and has the power to run your business.
The objective of an administration is to save the company from being liquidated and wound up. The administrator may try to find a buyer for the company, or decide to pay off the company’s debts by realising its assets. They also have the option to try to negotiate a Creditors’ Voluntary Arrangement so that the company’s debts are rescheduled, or they could decide to close the company.
The administrator will draw up a plan of action for the company administration, and notify creditors, employees and Companies House who will be invited to comment or approve the plan at a meeting. The administration will end once the administration plan has been achieved, or the administrator’s contract has terminated.
Liquidating a limited company to close it
Liquidating a company describes the process to realise its assets in order to pay off its debts and repay any balance to shareholders. The company is then wound up and struck off the Register of Companies at Companies House.
There are three possible types of liquidation:
- A creditors’ voluntary liquidation, in which directors of an insolvent company opt to realise the company’s assets, involving its creditors in the process
- A compulsory liquidation whereby an application is made to court to close the company, usually because it is insolvent
- A members’ voluntary liquidation where a solvent company is to be wound up
In a compulsory liquidation, a petitioner (usually a creditor) files a winding up petition to court in order to have the company closed down. This is usually because the company is no longer able to pay its debts, but it can also occur if there is an internal dispute within the company and the shareholders wish the company to be closed.
Once a valid winding up petition has been presented, the company’s bank accounts will be frozen, and any attempts by the company to dispose of assets will potentially be void.
If the winding up petition is successful, then the company will be liquidated. The Official Receiver will be appointed to dispose of the company’s assets, the directors will no longer have any power over the company, the employees will be dismissed, any proceedings against the company will be stayed, and the company will have to notify third parties that it is in liquidation.
Once the assets of the company have been realised, outstanding debts will be paid and any remaining equity passed to shareholders. After the process has been completed, the company will be dissolved by the liquidator.
Striking off an LLP
Limited Liability Partnerships or LLPs can come to an end in a similar way to limited companies, and for similar reasons, such as a desire to retire or a decline in business. In addition, if the members of an LLP fall below two for six months or more, the remaining member may have personal liability for debts, so it would be preferable to close the partnership.
LLPs that are struck off are solvent; if your LLP is insolvent, then you should seek insolvency proceedings as a means to end the business. Furthermore, an LLP that has been dissolved can be restored if there turn out to be outstanding creditors who remain unpaid.
An LLP may only make an application to be struck off provided it has not, during the three months preceding the application:
- carried on business
- changed its name
- sold assets that it normally traded
- engaged in activities other than those to be expected during the course of a business closure (engaging professional advisors for example)
As with companies, prior to an application to be dissolved, you must notify creditors and other interested third parties of your intention to strike the business off, and dispose of any assets. Application for a striking off is made to Companies House, and copies sent to banks, suppliers, customers, employees and former employees, HMRC and any other relevant persons such as landlords. The application is made public on the Companies House website and published in the London Gazette. In normal circumstances, the LLP will be dissolved three months or more after the date of the notice.
Members’ voluntary liquidation (MVL)
If your company’s affairs are not particularly complex, then applying for it to be dissolved (struck off) is the simplest and cheapest option. In cases where your company owns substantial assets, or is more complicated with a number of shareholders, then you may consider a members’ voluntary liquidation (provided your company is solvent).
An MVL is different from a dissolution as the closure is administered by a liquidator who will assist in the process. The liquidator will take responsibility of informing the company’s creditors and satisfying the outstanding company liabilities. After all of the debts have been paid, the remaining funds will be distributed to the shareholders and the company dissolved.
Prior to a company being considered for an MVL, a majority of the directors must sign a statutory declaration of solvency – that after having made a full inquiry into the company’s financial affairs, they are satisfied that it can pay its debts as they fall due, plus interest, for a period of a year from the beginning of the winding up.
Following the signature of the statutory declaration of solvency, the company will go into MVL if the members pass a special resolution for the company to be wound up within five weeks. At the meeting to pass this resolution, the members will also appoint the liquidator, who must be a qualified insolvency practitioner, and whose fees will be met from the company’s assets.
In an MVL, all creditors will be paid off, so they are not normally involved in an MVL. They will have to provide evidence to the liquidator of their debt. The liquidator will provide shareholders with updates on the progress of the liquidator, and they can raise questions with him or her, and can also object to the level of their fees if appropriate.
Changing your company to ‘dormant’
If you are not sure whether to close down your company, you can choose to register it as dormant for an indefinite period. You will still have to file an annual confirmation statement with Companies House, and a special set of accounts including a balance sheet. While the company is dormant, you cannot trade, carry on business or receive any income.