Closing Time: when and how should you close your limited company?

12/04/2024

While companies which close because of financial issues often make the news, a limited company can close for other reasons than being insolvent. Directors may wish to close the company if it has outlived its useful life, or they may be retiring without someone to pass the company on to and not wish to undergo the process of selling it.

So, when and how, depending on its circumstances, should you close your limited company?

When to close your company

There can be any number of reasons why a director would want to close their company. These can include, but are not limited to:

A change in the market could mean the business is no longer viable or there is no further need for it.
If the company is part of a group, a reorganisation could mean the company is no longer required.
The directors may wish to retire without a successor.
The company may have come to the end of its useful life.
Directors may just not want to run the company anymore and don’t want to go through the process of selling it.
The company could be insolvent, with debts of such a level that repaying them or restructuring the company is unfeasible.

Options when closing a solvent company

If the company is solvent, in good financial standing, and isn’t struggling with unbearable creditor pressure, directors have two options if they want to close that company:

Dissolution / strike-off
A dissolution, or strike-off, ends a company’s existence by removing it from the register of companies at Companies House. For this to happen, the company must have:

Not undergone any legal or insolvency proceedings in the three months leading up to the dissolution application.
Not have traded in the three months leading up to the dissolution application.
A finalised pension scheme.
Not undergone a name change.

Dissolution is only appropriate for solvent companies. While insolvent companies can apply for a dissolution, the process isn’t designed for them, and creditors are likely to object. Companies can also be restored for up to six years after being dissolved if a creditor has a valid reason to do so.

Solvent Members Voluntary Liquidation (MVL)

A Members Voluntary Liquidation (MVL) can be a more tax-efficient way of closing a solvent limited company if it has a sizeable amount of assets (more than £25,000). The process closes the company in an orderly manner, allows for faster distribution of funds than a dissolution, and potentially enables directors to claim Business Asset Disposal Relief (Entrepreneurs’ Relief until April 2020).

When an insolvent company might need to close

Companies become insolvent if their liabilities outweigh the value of their assets, or they can’t pay their liabilities as and when they fall due. If a company is insolvent, and its debts are of such a level that rescue and recovery arrangements would be unfeasible, then directors should consider closing the company. Directors can do this by entering an insolvent Creditors Voluntary Liquidation (CVL). This process closes the insolvent company, writing off its unsecured debts and allowing the directors to walk away if they’ve acted in the company’s best interests.

If directors ignore the signs of insolvency, the creditors could even force the company into compulsory liquidation by filing a winding-up petition.

To summarise

Companies can close for multiple reasons that do not relate to financial issues. Directors may wish to retire without a successor and without wanting to sell the company; it could have outlived its useful life, or a larger reorganisation of several companies means it is no longer needed. In such a case, and the company is solvent, directors can apply to dissolve the company. If the company has enough assets, it may be viable to enter a Members Voluntary Liquidation (MVL), allowing directors to claim Business Asset Disposal Relief. If the company is insolvent, and recovery or restructuring isn’t feasible, it can enter a Creditors Voluntary Liquidation (CVL), closing the company in an orderly manner, which is generally preferable to having the creditors force the company into compulsory liquidation.