What does dissolving a company mean?
Dissolving is the process of removing a company from the register at Companies House, in situations where a company has become surplus to requirements (i.e. it has fulfilled the purpose it initially set out to achieve) and is no longer trading. The most cost-effective and simple way for a director may be to apply to the Register in order to dissolve it.
What does liquidate mean?
Liquidation is when a company’s assets are extracted and used to pay off any remaining debts before that company is dissolved.
When it comes to liquidation, there are three main types:
- Compulsory liquidation: where creditors force you into going into liquidation as a way of recovering the owed debt.
- Creditors’ voluntary liquidation (CVL): appropriate in situations where you and your shareholders conclude that the company is unable to pay its debts. The process is managed by a liquidator and requires the input of your creditors. Your company’s assets are sold and any surplus is distributed to its members.
- Members’ voluntary liquidation (MVL): this is an option where the company is capable of paying its debts, but there is a desire on the part of (at least) three-quarters of the company’s members to wind up the company. A liquidator is appointed. Assets are converted into cash.
With compulsory liquidation, your hand is forced, and you have to appoint a practitioner who will guide you through the process. In other situations, you could be faced with more than one option for shutting down your company.
Voluntary strike-off and dissolution When is it a good idea?
This process can be useful when the company has served its purpose, it is no longer active and is unlikely to be in the future (i.e. if you’re retiring). If there’s a chance that you may wish to use the company again you should consider keeping it as dormant (it can remain dormant indefinitely, if you keep up with simple reporting requirements).
Dissolution is not a process for trying to evade creditors. If it is found you have failed to notify a creditor, your application to dissolve the company colud get you prosecuted and, in certain circumstances, barred from holding future directorships for a period of 15 years.
You can close your company by simply applying to the Companies House register if:
- It hasn’t traded or sold off any stock in the last 3 months.
- It hasn’t changed names in the last 3 months.
- It isn’t threatened with liquidation and has no agreements with creditors, such as a ‘company voluntary arrangement’ (CVA).
Before you apply to close your company, you must pay all the remaining creditors, dispose of any remaining assets and closing the company’s bank account. From the date of dissolution, any assets of a dissolved company are frozen and any credit balance will belong to the Crown. You must notify the HMRC, the Companies House and anyone who could be affected by this process within 7 days, including members, creditors still to be paid, employees, pension fund managers and/or trustees. If no objection is received within 3 months, the company is dissolved.
Creditors’ voluntary liquidation (CVL)
When is it a good idea?
CVL tends to be appropriate when business owners realize that carrying on is no longer viable. In such situations, you should seek advice from an insolvency practitioner immediately..
This can be an effective way of ‘taking matters into your own hands’: of engaging with creditors and putting forward your position before they take formal action themselves.
What is to be done?
- A meeting of shareholders is required, 75% of these shareholders (by value of the shares) must agree to a winding-up resolution.
- A liquidator (i.e. an authorised insolvency practitioner) is appointed. The resolution is sent to Companies House and is published in the publication ‘The Gazette’, which is the UK’s official public record.
You must also hold a creditors’ meeting where you present a statement of affairs setting out the state of the company and where those creditors may question you about the company’s failure.
The company assets are distributed according to the priority of the debt (secured creditors first, followed by unsecured creditors). On completion of the process, the company is dissolved.
Members’ voluntary liquidation (MVL)
When is it a good idea?
This is an option where the company is solvent (i.e. able to meet any debts), but there is still a desire to have it closed. One common example is a family business where the directors wish to retire, or where a business owner wishes to free up assets from an existing company to fund a new venture.
You may still have outstanding debts, but you are extremely confident that they will be discharged within 12 months from the beginning of the process.
You may be faced with a choice between MVL and applying for voluntary closing. All assets extracted from the company via liquidation are treated as capital for tax purposes. With voluntary strike off, assets after the first £25,000 are treated as income. If your company structure is relatively complex, if you’re a higher rate tax payer or the value of your company assets, after creditors have been paid, is likely to exceed £25,000, MVL may be the preferred way forward.
In a similar way to CVL, a liquidator is appointed and, after creditors have been paid, net liquid assets are distributed amongst company members.
Because of the involvement of a liquidator the administrative costs associated with MVL tend to be higher than with voluntary strike off. However, especially when it comes to tax considerations, this option may still make better financial sense.
