Why 99% of you won’t be able to close your company like this!
If you’ve been thinking of closing your limited company down, we can help you with all of the most important elements to consider. However, 99% of you will not be able to use the method that we are talking about today.
The method we are considering today is striking off a company.
Businesses tend to close for one of two reasons. These usually include either the owner having had enough, retiring or trying something different and therefore wanting to close the company or the business being unable to pay debts on time. A company that cannot afford to pay debts on time is usually labelled as insolvent.
If you decide it’s time to close your business, then you’ll be pleased to know that it’s usually quite an easy thing to do. This of course depends on your situation.
If your business is debt free, or hasn’t been trading for three months, or you know you can pay your debts off before you intend to close the company, then you’ll want to strike the company off.
Company strike off method
This method is also called a dissolution, which is completed through Companies House and means the business will cease to exist. To use this method, you will not require an insolvency practitioner, and it will only cost you £10 through the use of a DS01 form.
Using this method correctly means that you will not have a director’s investigation because you have been able to pay your debts on time so there is no reason to look for wrongdoings.
Closing your company through striking off means that your business will be advertised in the London Gazette (or similar based on where you live in the UK). This gives others the potential to object to your strike off, which can happen when creditors are involved.
If no one objects to your company being struck off the register within two months of the publication, then it will cease to exist.
Striking off with a bounce back loan
If you took advantage of the bounce back loan during the pandemic, you will not be able to use the method of striking off.
Striking off vs liquidation
Many directors struggle to see the difference between striking off a company and liquidating. While in both cases the end result will be company closure, there are some huge differences that you need to consider to ensure you don’t get yourself into trouble and end up personally liable for company debts.
Here is when you can strike a company off:
- No trading or business activities other than concluding company affairs over the last three months
- Must not already be in a liquidation procedure
- Must not have any outstanding agreements to creditors (this includes – bounce back loan, owed rent, money owed to HMRC)
- Must not have any outstanding legal action against your company (this includes if a creditor is about to issue a CCJ – you cannot strike the company off)
- All employees and creditors must have been paid in full
The method of striking off is an informal process with no investigation and very little action to be taken by you as a director.
Striking off a company with business debt
If you’ve been seeking advice due to financial problems and business debt, you may have been advised that you can try and strike off your company. Here’s a scenario for you…
Let’s say you owe £10,000 to HMRC and £3,000 to a supplier. But, your company has got no money, no way to trade, no assets to realise and you cannot afford to pay an insolvency practitioner to close the company down.
What are your options?
One option is to write to your creditors (HMRC and the supplier) and explain to them that you have no way of paying them the money you owe. Within this letter, you should explain that you are going to file a DS01 form (you should attach a copy of this). You can then invite them to pay for the liquidation of your company themselves.
In a situation where you cannot pay back money you owe, it is highly unlikely that HMRC and the other creditor will object to your strike off. This is because it will cost them more than £3000 to recover the money from your business.
The main warning attached to striking off your business is that your creditors are able to reinstate the company at any time. This means that you would be in debt to the creditors again and have to pay them back.
Striking off in this way is really only an option if you have no other avenues left to try, your back is against the wall and you’re stuck in a bad financial situation.
If you do choose to attempt to strike off the company with business debts, you must ensure that you inform your creditors before you file the DS01. This will leave you in a much better position as it shows you have been honest.
Please remember that a bounce back loan is not the same as this other business debt. A bounce back loan is lent to you by the bank, not a regular creditor in this instance.
The bank who lent you the loan will be tracking your company whenever you do anything, whenever you submit accounts, any CCJs, winding up petitions, they will be made aware. When they find out that your company has filed a DS01 form in an attempt to strike off the company, they will object.
This is mainly because the banks will be unable to claim their guarantee from the government if you have decided to strike off the company.
If you have already struck off your company, you will need to be very careful. The banks will likely soon reinstate your company and you will have to pay back the loan. If you know you have debts, you should really reinstate the company yourself and get started with a formal insolvency procedure.
What’s a liquidation?
A liquidation is the formal end of a business. If you have business debts then a liquidation is the right way to close your company.
To complete a liquidation, you have to appoint an insolvency practitioner.
The role of an insolvency practitioner is to close the company down formally, complete a director’s investigation and deal with any creditors. The investigation will be used to assess your conduct leading up to the closure of the company. This is to check you have acted responsibly and within the interest of your creditors.
For most directors, there are no issues of wrongful trading or preference payments, so you’re free to enjoy your life and stop worrying about company debt. However, a small number of directors may not have acted responsibly, this will be reported by the practitioner and the director may face trouble.
No liquidation is free, and the costs can vary a lot. Our advice would be to shop around and be wary of cheap liquidation costs. Those quoting low prices have usually failed to check important elements such as the director’s loan account. This can mean that you will end up in much more debt at a later stage in the process.
There are three types of liquidation that can be used, depending on your personal circumstances.
Creditors Voluntary Liquidation – this involves your company being insolvent, so you cannot afford to pay your debts. An insolvency practitioner is appointed and they are responsible for selling assets, any money realised is used to pay off creditors.
Members Voluntary Liquidation – this is used by companies that are solvent and can afford to pay back their debts. This method is usually used for retirements within a company. An insolvency practitioner should be appointed but will charge less than a CVL. A member’s voluntary liquidation should only cost around £1000 to £2000.
Compulsory liquidation – this is quite serious and is initiated by a creditor who has tried and failed to recover money from your company. At this stage they will issue you with a winding up petition, where you will be given a court date. If you cannot pay the debt, the company is wound up. An official receiver will get hold of your job and you will be investigated by them or an insolvency practitioner.
A compulsory liquidation is not a great thing to have on your record as it is a tell-tale sign that you buried your head in the sand and did not act responsibly within your company. It is also the most extreme action that a creditor can take to try and recover their money.
Can I close my company myself?
No, if you are using a liquidation process, you cannot close the company yourself. You have to use a licensed insolvency practitioner to close the company in the UK. However, if you are using the strike off method, yes you can complete the form yourself, if you meet the necessary criteria.
If you’d like any advice or honest information about any issues that your company might face through liquidation, we’re always happy to chat with you. Do not attempt to strike off a company with a bounce back loan, it will not work.