There are many ways to close a company and the route chosen is entirely dependent on the circumstances.
An insolvent company is one which is unable to continuously meet its outgoings when they fall due or where its liabilities exceed its assets. Directors of companies have legal obligations, including ensuring that creditors’ interests are protected. Once a director becomes aware of a company being insolvent, they are obliged to address the issues. If they do not deal with these issues appropriately, directors risk being liable for “wrongful trading” and can be fined and disqualified from acting as director.
In some cases, insolvent companies may need to go down the route of a formal liquidation. This could be in the form of: -
- Creditors’ Voluntary Liquidation (“CVL”)
In a CVL, the directors/shareholders decide to liquidate the company and appoint an Insolvency Practitioner to carry out the process.
Any assets are realised and debts are cleared as much as they can be; if any debts remain after this process, they are written off. All trading ceases, employees become redundant and the company ceases to exist.
- Compulsory Liquidation
This is a process imposed by creditors and often takes place following a request to the Courts by a creditor.
If the company has assets, these are realised and funds are distributed among creditors. In some cases, an Insolvency Practitioner is appointed by the Secretary of State or, in other instances, an Insolvency Practitioner may be appointed at the request of a creditor.
A solvent company is one which can continue to meet its debts when they fall due and where its assets exceed its liabilities.
An insolvency process doesn’t always happen because a business is in financial trouble. For example, where a company reaches the end of its’ life, or the directors want to retire from the business, an insolvency process is often used. In these sorts of cases, there are a couple of options: -
- Members’ Voluntary Liquidation (“MVL”)
An MVL is a formal insolvency process, carried out by an Insolvency Practitioner. They realise the assets and settle liabilities of a company, before returning any surplus to the shareholders. This can be extremely tax efficient and can mean shareholders pay only 10% tax on the gain on the surplus (based on current tax rates).
- Company strike off/dissolution
Striking off or dissolving a company means that its name is simply removed from the Register of Companies. Once a company is dissolved, it no longer exists.
This is an informal process and whilst a company no longer exists, it can be reinstated in certain circumstances (for example, where a creditor can demonstrate that a company has actively failed to pay them).
An informal striking off of a company is only successfully available where all debts have been cleared. It can therefore be a useful process for companies with no debt and a small level of assets. For companies with no debt and larger levels of assets, it is often more tax efficient to follow the formal process of an MVL, to secure the current beneficial tax rates.
For further options, please also see our Restructuring services