Closing a company is a big decision, and one that you should ensure you have considered carefully. In this blog, we’re looking into budget-conscious company closure options.
It’s not uncommon for business owners to feel like they have very few options when it comes to company closure. The truth is that it highly depends on your company’s financial position. Limited companies can often be labelled as solvent or insolvent.
A solvent company is one that can afford to pay its debts on time and has assets worth more than its liabilities. An insolvent company cannot afford to pay its debts on time, and its liabilities may be worth more than its assets.
Financially insolvent companies will have fewer options available to them for company closure. These companies will be able to use a formal liquidation process, such as a creditor’s voluntary liquidation (CVL) or a compulsory liquidation.
Solvent companies can use more options, including a member’s voluntary liquidation, which is often the most tax-efficient way to close a limited company.
What options are there for a budget-conscious company closure?
What is a member’s voluntary liquidation?
A member’s voluntary liquidation can only be used by solvent companies that can afford to pay off outstanding debts. The company’s shareholders decide on this process, and 75% of them must agree for the process to begin. Directors must sign a declaration of solvency when using this method.
For the process to be completed, a licensed insolvency practitioner must be appointed. They will handle all aspects of the closure, ensuring that all of the necessary steps are taken care of.
There are tax benefits to using this method, as shareholder distributions may be labelled as capital gains tax, rather than income tax. All shareholders should assess whether they can utilise Business Asset Disposal Relief. This will not be available to all directors.
What is a strike-off procedure?
A strike off or company dissolution is not recognised as a formal liquidation procedure, as it is handled by the directors themselves. There is no requirement to work with an insolvency practitioner for this method.
This method of company closure can only be used by solvent companies that have already paid off their outstanding debts.
The process begins when the director fills out a DS-01 form. This form costs just £33 to complete. It must be sent off to Companies House, which will review it. Once this step has been completed, the potential strike off will be advertised in the local Gazette. This allows your creditors to object to the strike-off if necessary.
If your creditors object, you will not be able to close the company, and you may be forced into compulsory liquidation. If you attempt to strike off a company with debts and succeed, the company will likely be reinstated to pay back the debts. In some cases, directors may even become personally liable for repaying the debts.
HMRC frequently objects to strike-offs, especially if tax returns or liabilities are outstanding.
If the process is completed correctly, then the company will be removed from the Companies House register and cease to exist.
What is a company voluntary arrangement?
A company voluntary arrangement can be an excellent solution for businesses, but it’s vital that you take the time to consider it carefully, as it does not work for everyone.
This method involves creating a formal agreement with creditors that outlines your business’s repayment schedule over time. A CVA can be used by companies that are struggling financially, but still see a valid hope of recovery for the future.
For the process to begin, at least 75% of the company’s creditors must agree to it. When this process begins, the company continues to trade as it did previously. It can be beneficial for directors, as creditors are usually unable to take further legal action unless the director fails to pay them in accordance with the agreed terms.
Many directors favour this option over company liquidation as it can be cheaper and allows the business to continue rather than being closed. As we mentioned previously, it’s essential to seek trusted, personalised advice, as this process isn’t suitable for everyone.
What is company administration?
Administration is another option which may be more cost-effective for company directors. However, there are instances where an administration can be more costly; therefore, it’s essential to seek professional advice.
Administrations are often used to help businesses get back on track or to allow them to be sold. A licensed insolvency practitioner must be appointed to facilitate the process. There are various options available that an insolvency practitioner can assist with, including selling the business as a going concern or restructuring it.
How much do these options cost?
The exact cost of each company closure method varies based on the amount of work involved for the insolvency practitioner. It’s worth speaking to a few options and seeing what prices they come back with.
Before you appoint a liquidator, you need to ensure that they have checked all aspects of your business, including any potential evidence of wrongdoing, personal guarantees or overdrawn directors’ loan accounts. If these factors are not taken into account from the outset, it can have serious consequences for directors.
It is also worth noting that personal guarantees are not affected by liquidation, and directors remain liable for them even if the company is closed.
Insolvency practitioners are legally required to check for any wrongdoing within their directors’ conduct report.
It’s vital that you ask for all business liquidation costs in writing from the insolvency practitioners. This helps to give you some security and reduces the risk of paying more later down the line. Of course, this depends on whether you have informed them about the issues listed above.
Here are some general costs for these types of closures
- Member’s voluntary liquidation: between £2000 and £7000
- Strike off: From £33
- CVA: between £5000 and £10,000
- Company administration: between £5000 and £10,000
These budget-friendly processes are likely to cost more if you have complex company assets, have more unpaid debts or are facing personal liability for company debts. Some directors may be eligible for redundancy payments, which can help towards a formal insolvency process. You will need to assess whether you meet the criteria for these payments, such as having a contract of employment and being on payroll.
Before agreeing to any company closure method, consider the financial and tax implications. You should always ensure that you follow all legal advice regarding your company’s financial situation to achieve the most suitable outcome. We hope this blog has been helpful regarding budget-conscious company closure.
Ensure that you seek expert advice tailored to your specific situation. At 1st Business Rescue, we provide confidential and trusted advice for company directors considering closure or rescue. Contact us to see how we can help.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
We are one of the only 5-star corporate insolvency companies on Trustpilot, with hundreds of 5-star reviews. Contact our friendly team for insolvency advice.