How can You Close Your Company in an Orderly Manner?
by Ankita Tripathy Business 20 November 2024
While it’s easy to associate company closure with a failure to properly manage, as a director, you can choose to close your company for any number of reasons.
You may want to retire without a successor to replace you. The company may have served its purpose and will no longer be required. Alternatively, it may be under pressure from creditors who want their money back that the company doesn’t have.
Whatever your reasons for wanting to close the doors, you should know your options. Those available will vary depending on your company’s circumstances, including, most importantly, its solvent position.
So, what are your options as a limited company director, and are you considering closing the doors?
Is My Company Solvent or Insolvent?
Before deciding the process of closing a business, you should assess and determine its solvent position. This will affect the options available, so it’s important to clarify this early.
Signs that your company is insolvent could include:
- It lacks sufficient funds to pay its bills and liabilities as and when they fall due.
- You’re struggling to keep to your creditors’ payment terms.
- Your company’s liabilities exceed the value of its assets.
- Creditors have filed legal action against your company to recover what it owes. These could include County Court Judgments (CCJs) and Statutory Demands.
Options for Insolvent Companies
If your company can’t pay its liabilities as and when they fall due, then its options for closure are different.
Insolvent, voluntary Liquidation
Your company could be insolvent, with creditor pressure piling up, making trading impossible, and recovery may not be feasible. In this case, you can voluntarily close the company.
You can do this through a Creditors Voluntary Liquidation (CVL), which closes the company in an orderly manner, stopping all creditor pressure and legal action, writing off its unsecured debts, and allowing you to walk away from the company and start afresh. You cannot liquidate a company yourself, and the process must be dealt with by a licensed and regulated insolvency practitioner.
Winding up Through Compulsory Liquidation
If your company lacks the funds to enter a voluntary liquidation, or you ignore your creditors’ reminders and legal action, they could issue your company with a winding-up petition, forcing it into compulsory liquidation.
Your creditors can do this if you owe them more than £750. The accounts freeze once the company’s bank becomes aware of the petition, and trading becomes impossible.
Options for solvent companies
Even if your company is solvent, you might have reasons for which you want to close it:
- You want to retire with no successor or don’t want to go through the process of selling the company.
- The company has served its purpose or is no longer commercially viable.
In these cases, you will have different options to close your company than you would if it were insolvent:
Solvent, Voluntary Liquidation
Solvent companies with over £25,000 in assets can liquidate through a Members Voluntary Liquidation (MVL). Entering an MVL allows directors and shareholders to claim Business Asset Disposal Relief (BADR). Therefore, the process can be more tax-efficient than if the company were dissolved.
Dissolve the Company
If the company is solvent but lacks the capital or assets to qualify for an MVL, then you can apply for a dissolution. Dissolving the company ends its legal existence by striking it off the Companies House register.
To qualify for a dissolution, your company must fulfill several criteria. In the three months leading up to the dissolution, the company must have:
- Ceased to trade.
- No legal action against it.
- No ongoing insolvency proceedings.
You can file to dissolve an insolvent company. However, once the dissolution is advertised, any outstanding creditors may object. Dissolution can also be reversed for up to six years afterward if creditors have reason to or more liabilities are uncovered.
Steps for Closing a Business: A step-by-step Guide
The above processes will help you identify the closure process for a solvent or a non-solvent company. However, some steps are necessary and common while you seek closure for almost all different types of companies. You can follow the steps here to close your business –
Step 1: Documentation
First, you need to acquire your documentation. There are several documents you cannot start your business without. You need to contact the concerned authorities to obtain the documentation you need for closing a business. Before you begin the process of closure, make sure you have all the documents you need.
Step 2: Obtain Consent
Next, you have to obtain the consent of your business shareholders. If your business has multiple owners, you need the consent of other shareholders who make decisions for the business.
Step 3: Surrender Registration & Licenses
When a small business is striking off its operations, it has to surrender the licenses and the registrations obtained for business. However, there are terms and conditions regarding how to surrender the licenses and the certificates.
Some licenses are surrendered after the business is struck off, while others are done before the business closes. Make sure that you know the conditions for each type of license.
Step 4: Financial Statements & Bank Account Closure
Before the business closes down, the owner has to obtain the closure statement from the bank. This applies to businesses operating with a current account. All the financial documentation and bank closure statements must be obtained before the business shuts down.
Step 5: Drafting and Signing the Indemnity Bond
All the board members of the business have to sign an affidavit and indemnity bond declaring their personal and collective responsibilities for paying off the liabilities.
Step 6: Board Resolution
The next step includes calling a meeting among the board members. They have to elect someone ( preferably the director) to sign off all the applications regarding the business closure.
Step 7: Filing of ST-2 Form
Once all the prerequisites are fulfilled the business owners and the board members are ready to file their business closure application. The application is available online and will be submitted to the ROC in form STK-2. While doing so, the applicants must include all the necessary documentation for closing the business.
Step 8: Strike off By the ROC
Before the ROC strikes off the business and closes it, it has to examine it thoroughly. They verify the documents attached to the application, and the process can take almost a month. If the ROC finds the application flawless, it will strike the business off and notify through the Official Gazette.
In Summary
How you close your company depends on whether it is solvent or insolvent. If the company is solvent, then it may be suitable for an MVL if it has sufficient assets or directors and shareholders would benefit from BADR. Alternatively, if the company lacks the assets to justify a solvent liquidation, you could dissolve it.
If your company is insolvent, it will have different options. Closing an insolvent company is done through a CVL, which is generally preferable to the company’s creditors forcing it into compulsory liquidation through a winding-up petition. Attempting to dissolve an insolvent company is ill-advised, as creditors can object.
A licensed and regulated insolvency practitioner must carry out all types of liquidation.
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