While closing a company is often one of the last things directors might want to do, there are instances where closing a company is their best option and yields more benefits than the company continuing to trade.
Directors might need to limit the damage from a company’s insolvency; their circumstances could have changed, the company might no longer be viable, or they don’t want to run the company anymore.
So, in what situation is a director better closing their company than continuing to trade?
What is liquidation?
Liquidation is an umbrella term encapsulating several insolvency processes, though each process ends with the closure of a limited company. Any company can enter liquidation, be they solvent or insolvent, though this status will have a bearing on which liquidation process the company can enter.
Insolvent liquidation.
Typically, insolvent companies enter liquidation when they have so much debt or related issues that they cannot continue trading, even with the support of insolvency recovery processes like Company Voluntary Arrangements (CVA) or administration.
Telltale warning signs that a company is insolvent include, having more liabilities than assets, or being unable to cover its outgoings as and when they fall due.
Growing creditor pressure.
Mounting creditor pressure is another telltale sign of a company’s insolvent status.
Debtors can send repayment reminders in the early stages, but these can escalate into statutory demands and County Court Judgments (CCJs), as well as visits from debt collectors or enforcement officers.
CCJs stay on the company’s credit file for six years, making it harder to secure finance.
Pay attention to these demands and judgments; the consequences can be severe and lead to long-term damage to the company’s credit rating and overall reputation. Creditors can even file for a winding-up petition, ultimately leading to the company’s bank accounts being frozen and making trading impossible.
Solvent liquidation?
While liquidation is often associated with insolvent companies running out of road, companies in good financial health can still enter liquidation. Even with this strong foundation, directors may wish to retire without a successor, the company may have come to the end of its useful life (either due to changing markets or an internal restructuring), or they just don’t want the responsibilities and stresses of running the business anymore. Closing through a solvent liquidation has advantages over a traditional dissolution, including greater tax efficiency.
So, how do you close your company?
Doing nothing and hoping the problem will sort itself out causes more harm in the long run and reduces your company’s chances of achieving its desired outcome. Trading on as if nothing is wrong increases the chances of the company trading whilst insolvent, which could make you personally liable for the company’s debts.
As a director, consulting a licensed insolvency practitioner as soon as you become aware of any issues can dramatically improve the company’s chances of reaching the best possible solution.
These licensed and regulated professionals can assess your situation and suggest the most suitable options.
Depending on the company’s circumstances at the time of reaching out, it might be able to continue trading while repaying an affordable portion of its debts. Restructuring through an administration might also be possible.
Neither solution will be attainable if directors ignore the problem, and the IP may suggest an insolvent company enter Creditors Voluntary Liquidation (CVL). This process effectively closes the insolvent company and writes off its debts, allowing the directors to move on or start a new limited company.
If the company is solvent, directors can put the company into a Members Voluntary Liquidation (MVL). The process differs from a standard dissolution where the company is struck off the register of companies at Companies House, and can be helpful if the company has more than £25k in cash and assets.
In this case, an MVL can allow directors to take advantage of Business Asset Disposal Relief, making it an attractive prospect to companies with sufficient assets to justify it.
In conclusion.
Although closing the company might sound like the last thing directors would want to do, depending on its circumstances, it might be the best course of action. If the company’s cash flow is imbalanced and the liabilities outweigh its assets, creditors have started initiating legal action to recover what the company owes them, and if the company no longer has a viable future, it might be time to consider closing the doors.
Insolvency doesn’t have to be the deciding factor if you choose to close the company. Although not the only way to draw a line under an insolvent company’s debts, closing the company through a voluntary liquidation is generally preferable to leaving the creditors to wind up the company and force it into compulsory liquidation.
If the company has reached the end of its useful life or the directors wish to retire with no one else to continue the business, they can put the company into a solvent liquidation. Doing so could offer greater tax efficiency than dissolving the company and allows the directors to take advantage of Business Asset Disposal Relief.
