Winding Up a Limited Company
Winding up is the method of ending or dissolving a business. A winding up resolution results in Liquidation of a company by a licensed Insolvency Practitioner (IP). The intention is to reach the best financial conclusion possible for a company that is going to cease operating. It involves:
- Selling all the assets
- Paying off the creditors, and
- Distributing the remaining assets to the shareholders (if the company is solvent)
Whilst a limited company or partnership can be easily set up in a short time, and relatively cheaply, closing one down is far more complicated. The best way of closing down a limited company is dependent on whether the company is solvent or insolvent.
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Three Key Questions on how to wind up a limited company
What are the best methods of winding up a company that is solvent?
Regardless of whether the company is solvent or insolvent, the process starts with a resolution to ‘wind up’ the business. Depending on the circumstances, the resolution is made by either company shareholders or shareholders and then ratified by creditors.
There are two methods of winding up a company that is solvent:
- Company Dissolution
- Members Voluntary Liquidation (MVL)
This can also be known as ‘striking off’. It is a way of closing down a limited company by removing its name from the official Companies House register. After the name is removed the company ceases to legally exist.
The company must be solvent and there are other criteria to be eligible for dissolution. These are:
- The company must not have traded or sold any stock during the previous 3 months
- The company must not have changed name in the last 3 months
- The company must not be under threat of liquidation or other type of insolvency proceedings
- The company must not have an outstanding agreement with creditors, for example a Company Voluntary Arrangement (CVA)
The process of dissolving the company is quite simple in this circumstance and is done via a DS01 form which has to be signed by majority of the directors. The form is sent to Companies House and all ‘notifiable parties’, including creditors, employees and shareholders, and a notice is then placed in the Gazette announcing the decision to dissolve the company.
The company is officially dissolved 3 months after the notice, unless there have been any objections. The Gazette then runs a final notice confirming dissolution of the company. Dissolution is a cost-effective easy method of winding up a company where there are no outstanding debts, however, may not be the most tax efficient way of closing down the company.
In this situation the shareholders of a solvent company agree a voluntary winding up resolution and appoint a Liquidator. The role of the Liquidator is to realise the assets of the business in order pay off all creditors and to distribute the remaining capital to shareholders.
The company must be solvent which means that it is able to meet its obligations, and the value of its assets must exceed the total sum of all debts and liabilities. The majority of directors must sign a Declaration of Solvency. This confirms that they have thoroughly reviewed the company’s balance sheet and finances and the company is able to repay all existing and prospective debts, plus statutory interest, within 12 months of the liquidation date.
It is a criminal offence to make a false declaration. This method of winding up is often used by sole directors who wish to retire, or by a group of companies wanting to close down a subsidiary.
What is the best method to wind up a company that is insolvent?
Trading whilst insolvent carries the risk of disqualification as a director, financial penalties, and even a prison sentence. It is, therefore, important to recognise when there is no hope of business recovery and to put creditor interests above shareholder interests. Put simply, a company is probably insolvent when it can’t pay its debts or has more liabilities than assets on its balance sheet. In this situation, liquidation is a way of closing the company and there are two types:
- Creditors’ Voluntary Liquidation (CVL)
- Compulsory Liquidation
Creditors’ Voluntary Liquidation (CVL)
If a company is insolvent, a CVL is a way of closing it. In this situation the directors themselves begin the process of Liquidation. A CVL is one of the most usual ways for directors and shareholders to deal voluntarily with the insolvency of their company. It is usually started by directors agreeing to hold meetings of shareholders to discuss placing the company into Liquidation.
If this is determined as the best method to wind up a company in this situation, the shareholders then appoint a Liquidator to deal with the CVL and the appointment is then approved by creditors. Once appointed, the Liquidator has three main functions:
- Realise the assets of the company
- Agree the claims of creditors of the company
- Investigate the affairs of the company and the directors conduct.
We would advise a CVL is appropriate when the company is insolvent and/or the business does not appear to be viable, even after restructuring.
This follows when action by creditors forces the company to close down. Any creditor can apply to the Court for a winding up order if they have sent a 21-day Statutory Demand for a debt of £750 or more which remains unpaid.
After it is passed by the Court, a winding up order seals the fate of a company unable to make payments to secured or unsecured creditors.
The Compulsory Liquidation process is as follows:
- A Statutory Demand is sent to the company for payment within 21 days
- The creditor can petition the court for a winding up order if the debt remains unpaid
- After the winding up petition is advertised in the Gazette, the company bank accounts will be frozen
- The winding up order essentially means the end of your business
- Company assets are liquidated to pay creditors
How do I find the right advice on the best method to wind up a company?
If you are concerned that your business is insolvent or heading for insolvency, it’s important to get expert advice. Whether you’re looking to speak in detail about how to wind up a limited company or want financial advice on another issue related to our business, we can offer expert advice.
You can contact our experienced team here at The Insolvency Experts today on 0300 303 8284, or you can email or fill out our online web form below letting us know when is best to contact you.