Closing a limited company

We consider companies that want to cease trading. Companies that are insolvent and would like to continue to trade do have other options available to them: these will be covered by a subsequent blog article.

Where the life of a company is coming to an end, the first thing to be established is whether or not the company is solvent (able to pay its debts). Following this evaluation there are different paths that the company can traverse.

Winding up a solvent company

If a company is solvent, has paid any outstanding creditors, then the company may be able to apply to be struck off the companies register (which is a simple process available within Inform Direct), if it has not conducted any of the following in the 3 months prior:

• Traded (or otherwise carried on in business).
• Sold any property or rights owned by the business which it previously sold while trading. For example, a coffee shop could not in those 3 months sell coffee, but it could sell their coffee machine, tills, and furniture.
• Changed its name.
• Engaged in any activities other than those required to dissolve the company, conclude its affairs or comply with a legal requirement. This allows a company to have sought (and paid for) professional advice in relation to dissolving the company.

Where a company still has creditors to pay, or has conducted such actions in the last 3 months (and waiting 3 months isn’t an option), the company can go through members’ voluntary liquidation.

MVL – Members’ voluntary liquidation

The first step in this process is that the board resolve to make a ‘Declaration of Solvency’, or for Scottish companies, complete form 4.25 which includes a declaration of solvency. Such a declaration includes the following:

• The name and address of the company.
• The names and addresses of the company’s directors.
• How long it will take the company to pay its debts (this must be no longer than 12 months from the date that the company is liquidated).
• A statement of the company’s assets and liabilities.

This is signed by a majority of the directors in the presence of a solicitor or notary public.

Within 5 weeks of completing this declaration a general meeting of shareholders is held to pass a special resolution to wind up the company and an ordinary resolution to appoint a licensed insolvency practitioner (even though the company is solvent it must appoint a licensed insolvency practitioner – sounds like a oxymoron, I know!). The UK government maintain an online list of licensed insolvency practitioners.

Within 14 days of the general meeting, the resolution to wind up the company is advertised in The Gazette (or The Edinburgh Gazette), and within 15 days, the signed declaration of solvency, or form 4.25, is sent to Companies House or, in Scotland, the Accountant in Bankruptcy.

The liquidator then works to wind up the company. Any money leftover is divided amongst the shareholders.

Winding up an Insolvent Company

Where a company is insolvent, it will most likely choose to go through creditors’ voluntary liquidation (CVL – the most common form of liquidation), which will involve the company’s creditors. The other option is compulsory liquidation, which is usually forced upon a company by a creditor petitioning the court for a winding up order, although it is possible for the company to choose to go down this route themselves.

Liquidating a company via CVL is generally the preferred option for insolvent companies. It is often better for the people involved as they have more control during the process, for example it allows them to be involved in the appointment of the insolvency practitioner. Compulsory liquidation is fraught with difficulties for both the company and the directors individually, for this reason most companies choose to enter CVL (or a Company Voluntary Arrangement, CVA) if they are faced with a winding up petition.

The best course of action when deciding which path to take is best, is of course, to talk to an insolvency practitioner for advice.

CVL – Creditors’ voluntary liquidation

Where a company has decided to proceed with winding up the company through creditors’ voluntary liquidation, it will:

• Hold a board meeting to authorise the calling of a general meeting to consider the special resolution that the company is wound up.
• Hold a general meeting to consider the special resolution to wind up the company and an ordinary resolution to nominate an insolvency practitioner as liquidator.
• Provide notice of a creditors meeting, that must take place no later than 14 days after the general meeting. The notice must be at least 7 days prior and:
  • Be advertised in the appropriate gazette, and also, in the case of a Scottish company, 2 local newspapers; and state the name and address of the insolvency practitioner, or
  • A place in the principal area of business where a list of the company’s creditors will be available.
• Hold a creditors meeting at which:
  • The liquidator will be present and will be appointed (or an alternative will be).
  • Will be presided over by one of the directors with a prepared statement of affairs, verified by affidavit.

Once appointed, the liquidator then works to wind up the company.

Winding up by court order or compulsory liquidation

For the company to apply to the court to wind up the company via this method, it must:

• Have debts of £750 or more; and
• By way of a special resolution, have agreement of 75% of the shareholders, by value of shares.

For a creditor to apply they must be owed £750 or more and prove that the company can’t pay them.

To apply, a winding up petition form is completed (it has 2 parts) and differs slightly for Scottish companies. If the ‘paid up share capital’ of the company is £120,000 or more the petition can be submitted online and it’ll go to the High Court. If it is below £120,000 it is sent to the nearest court, that deals with bankruptcy.

A creditor applying through this means may be able to reclaim these costs from the company, if they can afford to repay it.

If the petition is accepted, a date for the hearing will be set, before this date the applicant will:

• ‘Serve’ a copy of the petition to the company, completing a certificate of service when done; and
• Put an advert in the applicable Gazette at least 7 days before the hearing.

A copy of the advert, form Comp 7 and the certificate of service must be sent to the court at least 5 days prior to the hearing.

The applicant, or their solicitor, must be present at the court hearing and, if successful, the court will give a winding up order and will put the Official Receiver in charge of the liquidation. A copy of the order will be sent to the company’s registered office address. The Official Receiver will then start liquidating the company.

The role of the liquidator

Whether through members’ or creditors’ voluntary liquidation, or compulsory liquidation, once appointed, the liquidator takes control of the company and works to close down the company. The amount of time this takes varies with the complexity of the affairs of the company being wound up. As soon as the liquidator is appointed the directors no longer have control of the company, or anything it owns, and they can no longer act on behalf of the company.

Where the liquidator is the Official Receiver, they may complete the liquidation themselves or appoint another liquidator to act on their behalf.

Among other duties, the liquidator will:

• Sell off assets and use the money to pay creditors.
• Settle legal disputes and outstanding contracts.
• Make filings and keep authorities informed.
• Interview directors and report on what went wrong in the business.

Once the liquidator has completed the liquidation they will notify Companies House. Three months from the receipt of this, the company will be removed from the register of companies.