How to Close Your Company: Directors Guide

October 28, 2023 / Business Insolvency

There are a number of ways to close a company. The best option depends on your specific circumstances, with one of the most important being whether your company is solvent or insolvent.

Although every method of closing a company has the same goal, key differences set each method apart. To make the closing of your company as smooth as possible, it’s essential to know the ins and outs of each procedure.

In this article, Clarke Bell gives a complete guide to each method of closing a company. We will discuss the unique qualities of the available procedures, cover the core advantages and disadvantages, and provide additional information that can help make closing a company a bit easier.

Closing your company – what are your options?

While several factors influence which method of closing a company is best, the main factor is its financial state. Company closing methods can be broken into two main categories, namely solvent and insolvent.

A solvent company is one which has no debts that it cannot pay. An insolvent company is one which cannot pay all its bills.

Within these two categories the primary methods of closing a company are Members’ Voluntary Liquidation and company dissolution (for solvent companies); and Creditors’ Voluntary Liquidation (for insolvent companies). There are other ways of closing a company, which we will discuss later.

How to close a solvent limited company

Closing a solvent limited company can often be done using a Members’ Voluntary Liquidation (MVL). This procedure sports a range of strong benefits, chief among them being an unparalleled level of tax efficiency.

Should the benefits of an MVL be unappealing, as may be the case for some small companies, then company dissolution is a viable alternative. We will cover this alternative in its own section later.

Members’ Voluntary Liquidation

An MVL is one of the most commonly used methods of closing a solvent company. It is most effective for companies that have retained profits in excess of £25,000, as this allows such companies to make the most of this tax-efficient procedure.

In order to close your company using an MVL, the company must be solvent (i.e. able to pay all debts and liabilities within 12 months) and the company director will need to swear a Declaration of Solvency to evidence that.

A company that can’t confirm its solvency will not be eligible to enter into an MVL.

Company Closure


What is a declaration of solvency?

A Declaration of Solvency is the primary prerequisite for an MVL. Directors must swear a Declaration of Solvency before undergoing the procedure. Once sworn, it serves as legal proof that the company in question is considered solvent and eligible for an MVL. If made in error or outright deceit, it can serve as evidence against the directors who signed the declaration.

If you decide to swear a Declaration of Solvency, you must do so in front of a practising solicitor. (The fee is normally around £30.) Declarations not sworn in front of a solicitor cannot be used as evidence that a company is solvent.

Tax efficiency with a Members’ Voluntary Liquidation

One of the key benefits of an MVL is tax efficiency. Solvent companies with retained profits over £25,000 can expect to keep a much greater percentage than with other procedures. This is accomplished primarily through two factors: the classification of gains and the application of Business Asset Disposal Relief.

In an MVL, profits gained from disposing of assets will be taxed under Capital Gains tax rates, rather than under Income Tax rates. This will be considerably cheaper, and alone will result in directors saving a substantial amount on their tax bill. Reducing your tax bill even further is possible due to Business Asset Disposal Relief.

Business Asset Disposal Relief

Formerly known as Entrepreneurs’ Relief, Business Asset Disposal Relief (BADR) is an option for companies closing under an MVL. Eligible directors can use this relief to make the procedure as efficient and cost-effective as possible. Capital gains made through the sale of assets will be taxed at 10%, greatly reducing a director’s tax bill. This relief can be used as many times throughout a director’s career as desired, although it does have a lifetime limit of £1 million. Any gains made over this limit will not benefit from the effects of BADR.

Who can initiate a Members’ Voluntary Liquidation?

An MVL can be initiated by a company’s directors at any time, provided the company is eligible for the procedure. If a company has only one director, then the procedure can be initiated with a Declaration of Solvency, the appointment of an insolvency practitioner, and the preparation of the necessary paperwork. If a company has two or more directors, then the approval of a majority of the board must be obtained.

MVL & CVL Bar Chart


How to close an insolvent limited company

If your company is insolvent, i.e. it cannot repay its debts and other liabilities within 12 months, then you cannot use procedures intended for solvent companies. Instead, you have a series of other options available, with some more beneficial than others. The most common voluntary method is a Creditors’ Voluntary Liquidation. Company administration is an alternative to a CVL. However, if directors do not take decisive action, then the company’s creditors may choose to place the company into compulsory liquidation. We will cover each of these procedures below.

Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is one of the most popular methods of closing an insolvent company. This is for good reason; a CVL provides a series of excellent benefits for insolvent companies, benefits that are difficult to find in other procedures. The procedure offers an efficient means of closing a company, allowing directors to appoint an insolvency practitioner of their choice, and ensuring any assets are disposed of efficiently, with the proceeds going to creditors according to a repayment hierarchy. Once all distributions are made, the company will be wound up and removed from the Companies House register.

A CVL also affords directors certain legal benefits. First and foremost, once a company is entered into a CVL, it will be protected from creditors looking to take legal action. This can be a very helpful benefit for companies facing intense creditor pressure. As it is a voluntary procedure, closing a company via a CVL is a strong defence against accusations of director misconduct. Once all possible payments have been made, any remaining debts will be written off, with the exception of debts secured by a personal guarantee.

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How long does a CVL take?

The length of a CVL will vary from company to company. Some companies will experience a speedy procedure, especially if managed by a prudent director who prepared all necessary paperwork beforehand. Other, more complicated situations will require more time. As a general rule, you can expect a CVL to take several months, assuming your situation is not complicated. If your company is in a more complex position, your insolvency practitioner will likely be able to give you a rough time frame.

Consequences of a CVL for directors

A CVL can have a range of positive outcomes for directors, from a reliable method of closing a company, to certain legal protections. As part of the process, insolvency practitioners are legally obligated to investigate director conduct. Should evidence of misconduct be found, then specific penalties and negative consequences for directors can apply.

Several penalties can be applied to directors found to have engaged in misconduct. For example, directors could find themselves personally liable for the company debt, be compelled to pay a fine, and potentially lose their director’s license.

Is a CVL right for my company?

Whether a CVL is right for your company depends on your situation. Companies facing terminal insolvency could find the procedure incredibly beneficial, as it prevents the situation from spiralling any further. Similarly, companies struggling under the weight of creditor pressure could find a CVL helpful, as it ensures creditors cannot take any legal action against the company or its directors. However, companies with a viable business model may want to consider a Business Rescue plan before liquidation procedures.

Company administration

While not strictly a method of closing a company, administration is certainly a procedure to consider. Company administration aims to give companies a chance at recovery, and so is only available for companies with a viable business model. However, if recovery methods fail, then partial sale, complete sale, pre-pack administration, or liquidation of the company can be considered. If you choose to place your company into administration, you will be able to appoint an insolvency practitioner as administrator. This administrator will help you find the best path forward for your company.

Compulsory liquidation

Compulsory liquidation is an involuntary method of closing a company. This means that it is initiated by an external party, such as a court, rather than a company’s directors. This is often the end result of a winding-up petition served by disgruntled creditors who are fed up with waiting for repayment. Although the decision is out of the directors’ hands, is there much difference between voluntary and involuntary liquidation?

In short, yes – with voluntary liquidation being the better option. Voluntary liquidation affords an array of benefits, from allowing directors to appoint an insolvency practitioner of their choosing, to acting as legal protection. Compulsory liquidation does not have these benefits. In fact, it is often the case that the inverse is true. For example, an Official Receiver will be appointed by the courts to carry out the procedure, and the compulsory nature can be a negative mark on a director’s reputation. If accusations of misconduct are made, this can be brought up in court to show a lack of initiative from directors. As such, it is best to avoid closing via compulsory liquidation.

Winding-up petition

Winding-up petitions are the primary method by which a company will be placed into compulsory liquidation. They can be initiated by a company’s creditors, such as HMRC, for a fee. This fee is often off-putting for creditors, making a winding-up petition a last-resort method of debt collection. As such, they are usually only pursued by a few creditors, or creditors that have tried every other available method of debt collection. This makes winding-up petitions difficult, though still possible, to stop. If you suspect your creditors are considering the winding-up process, it is a good idea to take action first and seize the initiative.

How to close a company using a company strike-off

A company strike-off, also known as company dissolution, is a viable alternative to liquidation. It has the same aim of closing down a company, though it follows a different path to reach this goal. It can be initiated by directors voluntarily with the approval of a majority of the board. Directors will need to submit a DS01 form to begin the procedure, which costs £8 via the online portal, and £10 in a paper format. This makes company dissolution an exceptionally cost-effective method of closing a company.

Once the DS01 form has been submitted, a notice of your company’s upcoming dissolution will be published in the Gazette. This allows other parties to object to your company’s dissolution, if eligible.

Objections will generally happen if you have attempted to dissolve a company with debts, which is not allowed. Doing so can lead to penalties for directors, as company dissolution should not be used as a solution for a company which has debts.

Assuming no objections are made, you may proceed with the dissolution. All assets must be removed from the company before the procedure ends, and the company will be stricken from the Companies House register. At this point, the company will be dissolved.

Why might a company dissolution be rejected?

It is possible for a company dissolution application to be rejected. This is typically due to an unpaid debt, though other factors could be involved. For example, if your company is currently engaged in a legal dispute, has changed its name in the last three months, or you neglected to inform a related party before attempting dissolution, then your attempt may be rejected. You will usually be given a reason if your application for dissolution has been rejected.