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While successful company owners will never want to think about dissolving their business, sometimes ‘winding up’ can be the only option available.
Winding up and liquidation essentially refer to the same thing – closing a company, making sure all of its affairs are dealt with legally, and removing it from the companies register with Companies House.
Limited company directors might choose to liquidate a company for different reasons. And the company might be able to use its assets to settle its debts (meaning it’s solvent), or it might not (meaning it’s insolvent).
Before we talk about liquidation, if your company is solvent but no longer active and you want to close it, you can strike it off the companies register. This will dissolve your company.
Keep in mind there’s a difference between a dormant company and a dissolved company.
If you think you’ll use your company in the future, you might want to simply tell HMRC it’s dormant (you’ll still need to file annual accounts and your confirmation statement).
But if you want to close a business completely, you can strike it off the companies register and dissolve it, as long as if it:
You have legal obligations before striking off your company, for example telling HMRC, treating your employees according to the rules, and dealing with your business assets and accounts.
If the conditions for striking off your company don’t apply, you’ll need to liquidate it instead.
Liquidating a company is also called winding up a company. The process is different depending on whether it’s solvent or insolvent.
During business liquidation, a company’s assets will be used to pay off its debts and leftover money will go to the shareholders.
There are three different types of liquidation, depending on whether or not your company can pay its debts. Creditors can also force your company into liquidation.
To close a business has many legal obligations and implications, so it’s important to get professional advice on the process.
If your company is active and solvent but you don’t want to run it anymore, you could choose members’ voluntary liquidation.
It could be that you want to retire, or you’d like to step aside and can’t find anybody else to run the business.
After you’ve reviewed the company’s assets and liabilities, English and Welsh companies should make a declaration of solvency, while Scottish companies should ask the Accountant in Bankruptcy for form 4.25. You’ll need to include your company’s assets and liabilities in your declaration.
And when making the declaration, you have to write a statement saying the directors believe the company can pay its debts, with interest.
Include the name and address of the company, the names and addresses of the directors, and how long it’ll take to settle the debts (this can’t be more than 12 months). Then you should:
While company directors will never want to be in this situation, if your business can’t pay its debts and there’s no hope of turning it around, you could choose company insolvency.
You can determine whether your business is insolvent in two ways. If it’s cash flow insolvent, the business can’t meet its liabilities when they’re due. If it’s balance sheet insolvent, its liabilities outweigh its assets.
Creditors’ voluntary liquidation gives company directors a degree of control over when and how they liquidate the company.
That’s because a company is sometimes faced with a winding up petition and compulsory liquidation from creditors (more on those below). Choosing creditors’ voluntary liquidation at an earlier stage means that you can appoint a liquidator yourself.
The company’s assets will be used to pay off debts and minimise creditor losses, but creditors are likely to face a shortfall.
Shareholders will need to agree to a creditors’ voluntary liquidation:
If your company can’t pay debts of £750 or more and enough shareholders agree, a company director can apply to the court for a winding up order. This means the company should stop trading and be liquidated.
But compulsory liquidation is often forced by creditors when a company owes them money. The process involves sending a winding up petition to the court, which is made up of two forms – Comp 1 and Comp 2.
Because compulsory liquidation is often forced, limited company directors usually want to avoid this route.
So it’s important to be realistic about your company’s financial situation – creditors' voluntary liquidation should give you more control over winding up your company.
According to CompanyDebt, HMRC presents the majority of winding up petitions in the UK.
Here’s the compulsory liquidation process for company directors:
Business liquidation has implications for company directors.
Once a liquidator is appointed, company directors have no control over the company and its assets. They also can’t act on the company’s behalf.
Company directors also need to cooperate with the liquidator – this might mean:
Liquidators can also determine whether a director’s conduct was unfit, which could lead to a ban on being a director for two to 15 years.
If your business has gone into compulsory liquidation or creditors’ voluntary liquidation, there’s also a five-year ban on forming, managing or promoting a business with the same or similar name.
Would you like any further information about closing a company? Let us know in the comments below.
Sam has more than 10 years of experience in writing for financial services. He specialises in illuminating complicated topics, from IR35 to ISAs, and identifying emerging trends that audiences want to know about. Sam spent five years at Simply Business, where he was Senior Copywriter.
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