The economy, markets, customer habits and demand are in constant flux, and can all impact a company’s viability. Depending on the situation, that could mean you, as director, may want to leave the industry and pivot to something new, or that the company itself can’t continue in its current form.
So, what should you do if you’re the director of a limited company that’s no longer needed or viable?
Why would directors close a company?
As a company director, closure feels like it should be the last thing on your mind if you want to succeed. However, external circumstances can impact whether its continuation is feasible.
If the company is insolvent, without sufficient funds to cover its liabilities, then closure may be an option to draw a line under its debts and prevent the situation from worsening, limiting losses to creditors and even potential personal repercussions.
Similarly, even if the company is currently solvent, directors can still close the company if they would rather do so than have it continue trading.
Changes in the market can influence directors to leave that industry, as can a lack of opportunities or benefits in selling the business to another party. Equally, directors might be nearing retirement age and either lack a line of succession or not wish to pass the company on to anyone.
As director, you should be aware of your company’s solvent position and look out for potential warning signs that indicate insolvency. These signs could include:
- Imbalanced cash flow
- An inability to cover incoming bills
- Legal action, such as Statutory Demands and County Court Judgments (CCJs) being filed against the company
If your company is displaying these signs of insolvency and creditor pressure is becoming unmanageable, then closure might be a better option than attempting to continue trading, depending on your circumstances.
How should I close a solvent company?
You have two options if you decide to close a solvent limited company:
- Dissolution
- Solvent liquidation
Closing through dissolution could be your best option if your company has few assets, including cash in its bank account, and it meets the following criteria:
- It faces no legal action
- It hasn’t traded for three months
- It has enough cash to settle its debts, including all employment liabilities (PAYE, National Insurance, redundancy pay, etc.)
- It is up to date with filings to HMRC and Companies House
- You have closed the company bank accounts
Solvent liquidation may be a better closure option if the company has sufficient assets, including cash at the bank (exceeding £25,000). In which case, the company could close through a Members Voluntary Liquidation (MVL).
Doing so means your company may qualify for Business Asset Disposal Relief (BADR). During which, the company’s assets are sold, with the proceeds used to repay any creditors’ and liquidators’ fees, and the remaining funds distributed between the company’s shareholders.
If your company has the required funds to justify an MVL, it can be quicker and more tax-efficient than closing through a dissolution.
Do I have to close my company if it is insolvent?
Your company is insolvent if it can’t repay its liabilities as and when they fall due. However, liquidation isn’t your only option to alleviate your company’s unaffordable debts.
Depending on your company’s circumstances and, to a lesser extent, the outcome you want for it, it might be possible to save the company.
If the company has a viable business model but the level of creditor pressure is making trading increasingly difficult, the company could enter a formal repayment plan like a Company Voluntary Arrangement (CVA). These allow your company to repay what it can afford in monthly instalments while it continues to trade.
In other cases, such as where the company has deeper-rooted issues, restructuring the company through administration may be a more viable solution.
If neither of those procedures are feasible, or you just want to close the company and draw a line under its debts, then you can do so via a Creditors Voluntary Liquidation (CVL). This closes the company in an orderly manner and ensures that you’re acting in its best interests and those of its creditors. Entering liquidation voluntarily also ensures a more controlled entry into the process, which is preferable to your creditors forcing the company into compulsory liquidation through a winding-up petition.
To summarise
If your company is no longer needed or viable due to a change in the market, or you wish to retire from acting as the company’s director with no line of succession, you could have several options. These options will depend on whether the company is solvent or insolvent, which you should be aware of as its director.
If the company is solvent, you could dissolve it if it has little in the way of assets or close it through a solvent liquidation if it has enough assets to justify the process.
Insolvent companies may be able to continue through formal repayment arrangements or restructuring, but if those aren’t feasible, your best course of action would be to close the company voluntarily. Doing so gives you more control over the process than if you allowed the creditors to force the company to close through a winding-up petition.
