If you are thinking of closing your limited company, there are a number of steps that need to be taken to ensure that you have followed the correct procedures as set down by the law and your Articles of Association.
Please note that it is recommended that you seek professional advice as soon as possible to ensure that you are taking the right course of action.
The first thing to think about before winding up the company is whether or not the business is solvent. A solvent company is defined as one with enough in assets to repay all creditors in full, as well as have money left over to distribute amongst the company’s shareholders.
If your company is solvent then you are able to choose a Members Voluntary Liquidation (MVL) to wind up and dissolve the company. The process involved in an MVL is dictated in part by the law and in part by your own companies rules as set out in your Articles of Association. The key to successfully complete the procedure is by understanding how these two factors interact.
How to make a members voluntary liquidation
1. You will need to write down a signed declaration of solvency which includes:
- The company name and official address
- Any names and addresses of company directors
- A statement of the company’s affairs, including assets and liabilities
2. The declaration should be signed by the majority of company directors or both directors if there are only 2 and witnessed by a solicitor or notary public.
3. A general meeting should be called within 5 weeks to pass a motion for MVL. Whilst the decision to wind up the company may be undertaken by the company directors, it must be passed by at least 75% of shareholders who have been given notice of the meeting.
4. Appoint a liquidator to be in charge of the process. Generally this will be someone outside the company, and is usually an accountant who has gone through specific training and has certain qualifications to allow them to practice as insolvency practitioners.
5. You need to advertise the resolution in The Gazette (which is the official public record for these types of notices), as well as sending your signed declaration to Companies House, within 14 days of the MVL motion passing.
The difference between MVL and dissolving a company
The simplest way to dissolve a company (also known as ‘striking off’) is to send a DS01 form to Companies House and pay the £10 fee. Notice to strike off will be posted in the Gazette and if there is no objection raised then your company will be dissolved within two months.
So why would any company choose the lengthier and more costly process of an MVL?
It all comes down to handling finances. With an MVL you involve a licensed insolvency practitioner, who has the skills and training necessary to handle the distribution of assets between shareholders correctly.
For businesses who do not hold very much in assets, striking off is no doubt the easiest way to go, although you would still need to be sure that you have enough to pay your debts and have made arrangements with your creditors. If the company is insolvent then striking off is not an option.
Any creditor that is owed money by your company can file an objection to the dissolution when listed in the Gazette and this will suspend your application. It is likely that your company would then have to apply for a different process to close – such as a CVL (Creditors Voluntary Liquidation) or administration.
What reasons are there to choose MVL?
- You want to cease trading
- There are a number of shareholders who want to split the company’s assets between them
- You are looking to retire or move overseas
- You own a group of companies and are looking to close a subsidiary company which is no longer active.
Benefits of an MVL
- It saves time and effort in preparing tax returns and ensuring compliance as the Liquidator will do this on your behalf
- Peace of mind for directors and shareholders alike
- Reduces the risk to directors
- Offers peace of mind to investors by simplifying the process and bringing in an unbiased party who will ensure that the assets of the company are distributed fairly.
- Easy access to funds
- There are lower tax rates on the money that is distributed amongst shareholders (explained further below).
One of the major benefits of an MVL for all shareholders is the tax breaks that it offers. Shareholder distributions are treated as capital distributions as opposed to dividends, meaning that they enjoy a lower rate of tax.
MVL distributions may also qualify for Entrepreneurs Relief, which is a government scheme that offers an even lower capital gains tax (10%) on any assets that qualify.
How much does an MVL cost?
The cost of an MVL varies depending on the liquidator that you hire and how complex your finances are to begin with. The cost of hiring an insolvency practitioner usually runs into four figures in most cases. If you want it to cost less then it is critical that the directors take care of most or all of the procedural issues before the process begins. This would include
- Paying all liabilities
- Completing and submitting any final returns
- Deregistering for VAT
- Deregistering as an employer
- Preparing final accounts
Outside of this there will usually be costs in the form of placing notices in the Gazette and the fees associating when submitting official documentation. This will likely not come to more than a few hundred pounds.
Please note however that the procedure must always involve a liquidator, and since their fees account for the majority of the cost of an MVL there is a limit to the amount of money that can be saved.
What if your company is insolvent?
If you want to close your company but do not have the money to pay back your outstanding liabilities then an MVL is not suitable for you. In these cases it is up to you to find an alternative closure method.
Creditors Voluntary Liquidation (CVL)
Similar to an MVL, a CVL requires the company to follow a similar process to an MVL. Your appointed insolvency practitioner will realise all your assets and determine all the debts owed and distribute the remaining funds between your creditors in a certain order. The distribution hierarchy tends to follow the order of:
- Secured creditors
- Preferential creditors (unpaid employees, for example)
- Unsecured creditors
Administration
During administration, your company will appoint an insolvency practitioner as an administrator, who will take over and look at the business to make a decision about what to do next.
They may, as with a CVL, attempt to pay back as much of your debt as possible with your assets, but they could decide to negotiate a Company Voluntary Arrangement (CVA) instead, so that you can keep trading in order to pay off your debts. Another option is that the administrator could sell your business to another company so that the business will go on trading with the same staff, orders and name, only owned by someone else. If there is nothing to sell and the company cannot be saved then the administrator will close it.
The difference between administration and a CVL is that the administrator is in charge of your business for the entire length of administration, and is able to make all decisions on its behalf.
How can we help
Closing a business is usually a time of great stress and worry for directors and shareholders alike. There are risks involved if it is done incorrectly so it is important that you consider your options carefully and come to a decision when you are armed with all the facts about your chosen closure method
An Accounting Gem adviser can give you the advice you need and talk you through all the options available. Please call us on 01473 744 700 or email us on contactus@aag-accountants.co.uk to find out more.
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