How To Close a Limited Company With or Without Debts

February 13, 2023 / Business Insolvency

It is the fate of most companies to close at some point or another. The reasons for this are plentiful; the company may be insolvent, its market share or profitability may be declining, the directors may wish to pursue other ventures, or they may simply want to retire. There are many, many more reasons why directors may choose to close a limited company, and not all of them are negative in the slightest. However, selecting the right method of closing a limited company isn’t always as easy as it may at first seem.

There are several methods of closing a limited company, each with its pros, cons, prerequisites, and best use cases. As such, it can be difficult for directors to settle on an appropriate solution, especially when handling the variety of other factors present when closing a limited company. To make the closing of your company more straightforward, it pays to understand your options before taking action.

In this article, Clarke Bell will discuss your options for closing a limited company, and which solutions may be best suited for your situation.

Closing a limited company with debts

When closing a limited company, there are two scenarios to consider; one involving the closing of a limited company with debts, and one without. Closing a limited company with debts is the more sensitive situation. It requires swift and decisive action, as failing to act within an appropriate time frame can result in your company being placed into compulsory liquidation. Moreover, there are many legal pitfalls to navigate, requiring the aid of a licensed insolvency practitioner.

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Closing through a Creditors’ Voluntary Liquidation

The main solution to closing a limited company with debts is to use a Creditors’ Voluntary Liquidation (CVL). As the name suggests, it is a voluntary insolvency procedure, affording directors certain benefits they would not otherwise enjoy. For example, they will be able to appoint an insolvency practitioner of their choice to fill the role of liquidator. This insolvency practitioner will essentially take control of the company, assuming the directors’ responsibilities for the procedure’s duration.

The insolvency practitioner will then begin liquidating the company, disposing of company assets, and emptying accounts. The proceeds raised will then be distributed amongst the company’s outstanding creditors and used to pay off other liabilities. When completed, the company will be wound up and cease to exist as a commercial entity.

There are several key benefits to closing a limited company with debts through a CVL:

  • The company’s directors can appoint the liquidator, as we have mentioned.
  • The procedure offers legal benefits to the company and its directors. Once the procedure has begun, creditors cannot take legal action against the company, essentially shielding it from compulsory liquidation.
  • Any debts that remain after the procedure will be written off, assuming a personal guarantee does not secure the debts.

If you’d like to know more about CVLs, read our complete guide to the process.

Closing through a compulsory liquidation

A compulsory liquidation is typically what happens when directors fail to take action in a timely manner. Unlike a CVL, it is an involuntary procedure, one initiated by a company’s outstanding creditors when they lose faith that they will receive repayments. Creditors can submit a winding-up petition to the courts which, if accepted, will evolve into a winding-up order and later a compulsory liquidation.

Once it begins, a compulsory liquidation will see the courts appoint an Official Receiver (OR) to fill the role of liquidator. They are responsible for disposing of company assets, emptying accounts, and dispersing the proceeds to creditors. They will also open an investigation into the conduct of company directors, with a view to finding out how much influence directors had over the company’s financial decline, if any. If misconduct is found, directors can face serious consequences, such as the disqualification of directors’ licenses, fines, liability for company debt, and potentially even a prison sentence. Moreover, as a compulsory liquidation indicates a failure to act on behalf of directors, future creditors may view it as a red flag. This is not necessarily the case for a CVL, as this procedure demonstrates a director’s willingness to act in the interests of creditors.

Closing a limited company without debts

Closing a limited company without debts is arguably much less stressful than one with outstanding debts. Directors of solvent companies do not have the same threat of legal action to worry about; instead, the main concern is how to retain as much of a solvent company’s profits as possible.

Closing through a Members’ Voluntary Liquidation

For solvent companies, the best method of closing is through a Members’ Voluntary Liquidation (MVL). It functions similarly to a CVL, wherein a liquidator is appointed, assets are disposed of, accounts are emptied, and the proceeds are distributed. Rather than go to creditors, most of the proceeds will be distributed amongst shareholders according to their ownership in the company.

Closing a limited company using an MVL is exceptionally tax-efficient. Profits raised as a result of liquidation are considered Capital Gains, and are therefore subject to Capital Gains Tax, rather than Income Tax. This alone means directors will pay much less tax than they would be using another method of closing. However, if a director is eligible for Business Asset Disposal Relief, previously known as Entrepreneurs’ Relief, they will enjoy further tax benefits on a lifetime limit of £1 million. With a combination of the relatively low CGT rates and Business Asset Disposal Relief, some directors can pay as little as 10% on their retained profits.

Closing through dissolution

An alternative method of closing a company without debts is dissolution, also known as a company strike-off. This process is ideal for companies with little in the way of retained profits, and would prefer a cheap and straightforward method of closing. It can be initiated by filing a DS01 form with Companies House, which can be done online or on paper, costing £8 or £10, respectively.

Once settled on as the preferred method of closing, directors must cease trading immediately. Steps must then be taken to wind up the company, including filing for the company to no longer be VAT registered, the payment of any outstanding creditors and liabilities, final payroll, and the submission of company accounts to HMRC. All assets remaining within the company should be disposed of or transferred, as anything still registered with the company after its liquidation will be considered “bona vacantia”, or without owner, and transferred to the Crown. After roughly three months, the company will be struck off from the Companies House register and cease to exist.

Clarke Bell can help

If you plan on closing your limited company, whether it be solvent or insolvent, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies close as efficiently as possible, and we can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly how we can help you.