Under the UK legal system, there are many ways of closing down a company. There are also many reasons for doing so.
The company may simply have stopped trading and become dormant; the owners of the company may wish to step-down and retire from the business; but the most common reason for closing down a company is that it has become insolvent.
When a limited company or limited liability partnership (LLP) becomes technically insolvent and unable to pay its debts there are two possible outcomes: either the organisation (a) continues to trade its way out of financial difficulties or (b) it is closed down and liquidated.
Clearly, the former option would be the preferred outcome, because if the organisation can reach agreement with its creditors to reschedule its debts, this restructuring would allow it to continue as a going concern. This process is known as Administration
What happens when a company goes into Administration?
Administration in an insolvency process where a licensed insolvency practitioner (IP), usually a firm of accountants, is appointed to take control of the day-to-day running of an organisation. This process allows time for it to be rescued, restructured or closed down in an orderly manner.
When an organisation is placed into Administration, creditors are unable to take legal action to wind it up, even though the organisation is technically insolvent and unable to pay its debts, unless they have requested approval from the Administrator.
This breathing space then allows the Administrator to determine what steps could be taken to turn things around. Once appointed the Administrator will explore a number of options to manage the affairs of the organisation:
- The Administrator could continue to operate the business until such time as it can be sold on as a going concern to a third-party investor. The new investor may bring in new capital or greater expertise which would allow a turnaround plan to be implemented.
- The Administrator could try to negotiate a Company Voluntary Arrangement (CVA) with creditors. This is where the IP agrees a debt repayment plan with unsecured creditors (within one month of being appointed). This needs agreement of 75% of creditors (by debt value) and they will only be paid a percentage of the money they are owed. Reaching an agreement with creditors under a CVA allows the company to continue to trade.
- The Administrator could enter into a creditors’ voluntary liquidation (see below) which would mean selling assets to repay creditors and eventually closing down the company in an orderly manner.
- If the Administrator determines that the company is beyond rescue, that the debts are simply too great and impossible to renegotiate and it has no assets to sell, then the logical decision would be to close the company down.
The Administrator has eight weeks from the date of appointment to issue a statement setting out what they intend to do.
What is liquidation of a company?
Liquidation is the formal process of shutting down an organisation. Liquidation means selling all assets, collecting all debts, settling any liabilities or legal claims and eventually returning the remaining proceeds, if any, to either the creditors (first) and shareholders (second).
Closing down a company: Administration vs liquidation
The principal objective of Administration is to try to keep the company going until such time as the company debts are either restructured or repaid from the company’s cashflow or assets.
If that cannot be achieved, then the Administrators’ role is to oversee the closure of the company by way of liquidation (through a process known as winding-up)
Liquidation is a legal option available to directors, shareholders and creditors when the Administration process has failed. There are a number of ways in which this process of closing down a company can be achieved.
Creditors voluntary liquidation
This is also known as an insolvent liquidation. As the organisation is insolvent and unable to pays its debts, a director can advise the shareholders that the organisation should cease trading.
Once shareholder approval for that course of action is received (it needs 75% of shares by value), then a winding-up order is made and a liquidator appointed.
The liquidators will prepare a document known as a “Statement of Affairs” which summarises the realisable (realistic) value of all known assets and liabilities. They will then arrange to sell-off all the company assets etc and repay creditors with the proceeds.
Under a creditors’ voluntary liquidation, it is very unlikely that the creditors will be repaid in full and they usually have to settle for a percentage of the amount owed to them.
Compulsory liquidation
Where the organisation is insolvent and unable to repay debts greater than £750, then a director makes an application to the court by way of a winding-up petition, requesting a judge to order the company to stop trading and be wound-up.
The company must present evidence that it cannot pay debts of more than £750 and that 75% of shareholders (by value) agree that the court can wind-up the company.
Assuming the court grants the winding-up order, an official receiver will be appointed as liquidator. The official receiver, who is a civil servant employed by the Insolvency Service effectively becomes an officer of the court. Creditors of the company also have the right to appoint their own insolvency practitioner.
Once appointed, the official receiver or insolvency practitioner will then prepare a document known as a “statement of affairs” which summarises the realisable (realistic) value of all known assets and liabilities. They will arrange to sell-off all the company assets etc and repay creditors with the proceeds.
Members voluntary liquidation (MVL)
Here, the organisation is actually solvent and capable of paying its debts. However, the owner(s) might want to retire or step-down for other reasons and there is no successor in place.
Equally, it is quite common in the property or private equity sectors to establish one-off Special Purpose Vehicles (SPVs) for a particular project (buying, renovating and selling a building for example) and once that project is complete, the SPV needs to be closed down and the profits distributed.
In order to achieve an MVL, the director(s) need to sign a ‘Declaration of Solvency’. This is a document which summarises the organisation’s assets and liabilities and provides evidence that it has the resources to settle all its liabilities within a twelve-month period.
Shareholders (members in an LLP) must then pass a resolution for voluntary winding-up and appoint a licensed insolvency practitioner as liquidator. The liquidator will sell all the assets, settle all the liabilities and return the surplus cash to shareholders or members (capital and profits).
Striking-off a company
When a company has stopped trading and become dormant (as it no longer generates any income or incurs any costs), there is usually no need to undertake an expensive Administration or liquidation process.
Instead, there is an option available to strike-off the company in order to close it down. In effect, this results in the company being removed from the register at Companies House.
You can quite easily strike-off a company which is dormant by completing a form DS01, which can be downloaded from the Companies House website. The form should be signed by the majority of the company’s directors.
Before the DS01 form is filed, the director(s) need to ensure that any remaining fixed assets have been sold, any outstanding customer debts have been recovered or written-off, all liabilities have been paid and legal claims settled.
Any remaining cash is then distributed to the shareholders before finally closing down the bank account.
