How Do I Close Down A Limited Company?

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Although it is not a universally known company like Coca Cola or McDonald’s, Genda Shigyō Paper Industries (源田紙業株式会社) has a far greater claim to fame than simply being a well-known brand. The Japanese paper distribution business is the oldest company in the world, dating back 1,247 years. The oldest European company is a restaurant. St Peter Stiftskulinarium which sits within the walls of St Peter’s Abbey in Salzburg, Austria has been operating since at least AD 803. It is claimed Christopher Columbus, Johann Georg Faust, and Wolfgang Amadeus Mozart are among the thousands who have dined there in the past 1,218 years. And in the UK, the oldest operating company is the charming Otterton Mill in Devon which was recorded in the Doomsday Book in 1086.

The above examples have survived due to a combination of extraordinary commitment and plenty of luck. However, the truth is most companies are unlikely to last forever. If you are looking to close down your company (known as dissolution or winding up), for reasons such as retirement, switching to a self-employed business structure, or returning to full-time employment, you cannot simply stop trading and close your website/shop/office/factory. There are several steps you need to complete to legally dissolve your company so you can move on with a clean slate.

The method you use to close down your company will depend on whether it is solvent or insolvent. If your business is solvent, the routes to closing down your company are:

  • Voluntary dissolution (striking off)
  • Members’ Voluntary Liquidation
  • Dormancy

Voluntary dissolution (striking off)

Certain conditions must be met before a voluntary dissolution can begin. To qualify, the company:

  • Must not have traded or changed names in the last three months.
  • Must not be under threat of liquidation.
  • Have no agreements with creditors, such as a Company Voluntary Arrangement (CVA).

If your company does not meet these conditions, you will need to voluntarily liquidate your company instead.

Before you dissolve your company you need to ensure all loose ends are tidied up. Steps in this process include:

  • Pay VAT and other tax  – if you are VAT registered, you need to inform HMRC that you are closing down your company by filling in a VAT 7 Form. Upon processing, HMRC will provide you with a de-registration date and you must account for all VAT payments up to this time. Furthermore, you will need to complete a final VAT return that accounts for any remaining stock and assets the company owns. If you plan to keep any equipment owned by the company, you will need to check if capital gains tax is owed. To find out how much corporation tax is owed, you will need to submit annual returns and accounts to HMRC.
  • Redundancy – if you must make staff redundant, you will need to comply with the redundancy process. It is incredibly easy to make mistakes when making redundancies, for example, not complying with the rules on consultation, leading to claims in the Employment Tribunal. Therefore, it is advisable to work with an Employment Solicitor during the redundancy process.
  • Payroll – once you have cleared all your employee-related payments such as PAYE, National Insurance, pensions etc, and staff have received their P45s, you can ask HMRC to close down your payroll scheme.
  • Pay off all debts – this includes any rent, loans, and HP agreements plus all your trade suppliers.
  • Close your company bank accounts – do this only after all the necessary payments have been made.
  • Divide company assets among shareholders – failure to do this mean the assets will remain under the company name once the dissolution process starts and they will become the Crown’s property and you will need to restore the company to retrieve them.

Once all the administrative duties have been completed, you can apply to have your company struck off the Companies Register. This can be done online by completing a DS01 form or on paper, in which case you would need to post the document to Companies House.

A crucial aspect of the voluntary dissolution process is giving notice to anyone who may be connected with the company. This includes:

  • Directors who have not signed the strike-off application.
  • Company members.
  • Creditors.
  • Employees.
  • Managers or trustees of any employee pension fund.

To ensure you fulfil your notification obligation, you must send a copy of the application to strike off to anyone affected within seven days. In addition, you are required to put a notice in the Gazette.

The purpose of giving notice is to provide the opportunity for any Creditors to come forth with their claim or to allow any interested party to object to the dissolution.

A person can only object to the voluntary dissolution of a company for the following reasons:

  • They have not been told about the company’s decision.
  • They believe the declarations on the company’s application are false.
  • The directors have broken the law, for example, they have brought and sold stolen goods or been involved in money laundering.
  • They want to take legal action against the company.

If a person wants to object to the dissolution of your company they must inform Companies House and provide evidence that one of the above four criteria applies. Any objection must be received at least two weeks before the Gazette notice expiry date (two months after the date of publication).

If an objection is made, Companies House will suspend dissolution for three to six months. During this time, the objector will need to act either by issuing legal proceedings or resolving the issue.

If there are no objections a second notice will be published in the Gazette, which means the company will not legally exist anymore (it will have been ‘dissolved’). If you owe late filing penalties to Companies House, it will normally accept the dissolution and waive the fine.

If you do not perform all your legal duties and responsibilities and pay what money is owed (including taxes), as a director, you could become personally liable. Furthermore, if the company becomes ineligible for voluntary dissolution due to becoming insolvent or it starts trading again, you must withdraw your dissolution application immediately using form DS02.

Members’ Voluntary Liquidation (MVL)

If you wish to avoid paying Income Tax and Capital Gains Tax, the MVL route to closing your company may be preferable to striking off. A liquidator is appointed by the shareholders and once all liabilities have been paid and company assets released, a capital distribution will be paid to the shareholders.

Although the directors normally initiate an MVL, an agreement of 75% of the shareholders is required to wind up the company. Within 14 days of the resolution, a notice must be published in the Gazette and Companies House must be informed within 15 days of the resolution.

Dormancy

If you wish to take a break from your business but want to keep your options open regarding being able to return, making your company dormant is a solid alternative as it does not involve striking off.

A company is classed as dormant if it is not actively trading and receives no alternative forms of income. All outstanding Corporation Tax must be paid before a company can be made dormant. There is no requirement to notify Companies House, but HMRC must be informed. Always take advice when extracting money out of a dormant company as although you can take money out to pay dividends to investors, a company loses its dormant status if dividends are paid to shareholders.

How can I close down an insolvent company?

If your company is insolvent you, along with any other directors can voluntarily terminate the business through Creditors’ Voluntary Liquidation (CVL). A CVL often follows months of stress and difficulty in trying to keep your company solvent. However, if all possibility of a positive comeback has been extinguished, a CVL is often the best solution for everyone involved in your organisation.

How do you know your company is insolvent? Two standard tests can be applied:

  • The cash flow test – a company is deemed insolvent if it cannot pay its liabilities upon the due dates.
  • The balance sheet test – if an organisation’s liabilities outweigh the value of its assets it will be deemed insolvent.

If your company is insolvent, the duty of its directors changes from promoting the success of the company to protecting the interests of the company’s creditors. If you breach this duty you could become personally liable for certain business debts and may, in the case of fraudulent trading, face criminal prosecution.

To implement a CVL you will need to call a members meeting and gain the agreement of 75% of the shareholders. If the Winding Up Resolution (as it is known) is passed, notice needs to be sent to the Gazette and Companies House and a liquidator appointed.

Once the liquidation is completed, the company will be struck off the register and any liabilities that could not be paid via the liquidation process will be written off.

Summing up

Once your company is removed from the register it will cease to exist. However, information about the company will be retained for 20 years and can be accessed through Companies House or the National Archives.

After reading this article you will see that closing a company is a complex process and fraught with risk if you are unsure of your duties and responsibilities. To ensure you protect yourself against personal liability, it is always best practice to work with a professional when closing down your company, whether it is solvent or insolvent.

Uniwide Formations specialises in the registration of limited companies and LLPs. As professional business service providers, we offer a wide range of related services and can advise you on all aspects of the voluntary dissolution of a company. To discuss any of the points raised in this article, please get in touch with us.

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