In the UK it is remarkably easy and cheap to form a limited company. For less than £100, perhaps even less than £50, you can have a company formed in a matter of hours. This compares to the situation in many other EC countries where the costs can run into thousands and it can take weeks, if not months, to get a company registered.
But, if your business has come to the end of its life, either because you can’t rescue it or because you no longer want to keep it going, you will find that closing down a UK company can be far from simple.
The normal way to close down a company is by starting a process called “liquidation” or “winding up”. This is a legal process in which a liquidator is appointed to wind up the affairs of a company and at the end of the process the company ceases to exist. This process does not mean that all the creditors (those to whom the company owes money) will get paid.
There are basically three different types of liquidation:
- Members’ Voluntary Liquidation: this is when the members (shareholders) of a company decide to put it into liquidation and there are enough assets to pay all the debts of the company. The members appoint and pay a liquidator themselves (or out of the assets of the company).
- Creditors’ Voluntary Liquidation: this is when the shareholders decide to put the company into liquidation but there are not enough assets to pay all the debts of the company. The creditors appoint and pay a liquidator themselves (or out of the assets of the company if it has any).
- Compulsory Liquidation: this is when a court makes a “winding-up” order for the company to be wound up, usually on the petition of someone who is owed money by the company, although the directors may also apply for a winding up order, usually because neither they nor the shareholders are able or willing to pay the fees – which can be high – for a voluntary liquidation. The court appoints and pays for a liquidator but can recover all or some of that from the sale of any assets.
If your company is unable to pay its debts it is said to be insolvent and should cease trading or the directors may become liable for the debts. If you suspect that the company is insolvent you must take professional advice and may need to liquidate the company, although it may be possible for licensed insolvency practitioner or a specialist business rescue advisor to negotiate arrangements with those to whom money is owed to keep the business trading. Note that being unable to repay shareholders does not make a company insolvent. They knew when they invested they could lose their money and are at the very bottom of the list of creditors who would only get paid after everyone else had been paid 100%.
So, take appropriate advice. However, there is an alternative to liquidation which I want to discuss next.
This is a simpler and cheaper method and is ideal for closing down companies which have no debts. However it can sometimes be used to close down companies which are insolvent – though this cannot be guaranteed.
In a typical case of a solvent company the steps would be as follows:
- The company should cease trading and carry out no further transactions, except those which are necessary to wind it up.
- Anyone that the company owes money to should be paid; otherwise they may object to the company being dissolved in this way. The company bank account should not be emptied or closed until all company debts have been paid. Any loans to or from any company directors or shareholders should be repaid.
- If any vehicles or equipment have been bought on any form of hire purchase, leasing or finance agreement, then the finance company should be contacted to establish the options for ending the agreement early.
- The company must apply to HM Revenue & Customs to (HMRC) have its VAT registration cancelled, using form “VAT 7” A final VAT return will need to be completed, and there may be a VAT payment due.
- If the company employs staff they should be issued notice and a final payroll run for them (bearing in mind that they may have redundancy payments due to them) and P45s issued. At some point the company will need to make a final P35 return of payroll information to HMRC.
- Any of the directors and the company secretary may wish to resign, though at least one director should remain in place to deal with the closure. Remaining as an unpaid director of the company should not affect their own personal taxes in any way.
- A final set of accounts will need to be prepared, and submitted to HMRC. However this is unlikely to be possible immediately after the company stops trading as there will be further expenses so a letter should be sent to the tax office informing them that the company has stopped trading, has no further taxable income, and will apply for dissolution in due course. Mention that final accounts will be forwarded in due course. If you do not do this then HMRC may object to the company being closed down.
- Any corporation tax should be paid from the company bank account. The company generally has 9 months from the close of business to pay this tax, but the company cannot be closed down until it is paid.
- Any money or equipment left in the company after all these expenses have been met should be paid out to the shareholders in proportion to their shareholdings. It may be worthwhile for the company to apply to HMRC to have such payments treated under Extra Statutory Concession C16. This treats all such final payments as capital gains instead of dividends and may result in less tax being due.
Once 3 months have passed since the business ceased trading the directors (or a majority of them) can make an application to Companies House to have the company struck off. You can get full details of how to do this from the Companies House website. There is a £10 fee and you can download all the forms free of charge.
If the company is insolvent then it still may be possible to use this process, however to do so you will need to get approval from all those to whom the company owes money by writing to them with a notice of intention to have the company dissolved. You have to confirm you have done this before Companies House will process the dissolution and if it later is proven that you didn’t write to everyone you could be guilty of perjury.
You probably will need advice on what to say in the letter but in general you need to explain that the company is insolvent, cannot pay its bills, and cannot continue to trade. Tell them that the directors want to dissolve the company but that if creditors object the company will have to go into liquidation and as there are no funds to pay for a voluntary liquidation one of them will have to petition the courts at their own cost.
Be aware however that even if trade creditors don’t object it is possible that HMRC will object if substantial sums of tax (Corporation, PAYE/NI or VAT) are due unless they can agree a repayment schedule with the shareholders or directors taking on personal liability. In this case, get professional advice before signing anything.