How to close a limited company

A company can be closed down using a formal procedure called liquidation, whether it’s financially healthy and able to repay its creditors, or experiencing unmanageable debt. It’s also possible to close a solvent limited company via dissolution, and this is an unofficial route suitable for businesses with few assets.

If you’re wondering how to close your limited company, much depends on its solvency, as if you use the wrong method you could face sanctions by the Insolvency Service. UK Liquidators has over 25 years’ experience of helping directors to voluntarily close their companies, and can provide the support you need.

What is company liquidation?

Voluntary liquidation comes in two main forms and offers a solution for both solvent and insolvent businesses. 

Members’ Voluntary Liquidation (MVL) is used to close a solvent company, while Creditors’ Voluntary Liquidation (CVL) is used to close a company which is insolvent. When a company is liquidated its assets are sold and the business removed from the register at Companies House where it then ceases to exist as a legal entity.

Formal liquidation processes must be carried out by a licensed insolvency practitioner (IP), and this provides valuable reassurance that all statutory requirements are met. In addition to CVL, compulsory liquidation is also an option for insolvent businesses although this is something which is forced upon a company by its creditors rather than being initiated by the insolvent company itself.

Members’ Voluntary Liquidation

Members’ Voluntary Liquidation offers an orderly route to company closure when the business is solvent, and is typically most suitable for businesses with around £25,000 in assets to distribute to shareholders. It’s a tax-efficient procedure, offering those eligible for Business Asset Disposal Relief (BADR) a reduced tax rate of 10 per cent on qualifying gains up to a lifetime limit of £1m.

Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation is appropriate if your insolvent company cannot be rescued and needs to be closed down to shield creditors from suffering any further losses. As with an MVL, business assets are sold (or 'liquidated') and the company is struck off the register, but in this case the proceeds of asset sale are paid to creditors rather than shareholders.

A CVL enables you to prioritise creditor interests, as required under insolvency law, and reduces the chances of the company trading wrongfully. Voluntary insolvent liquidation also offers you the opportunity to claim redundancy pay as a director if you’re eligible.

Compulsory liquidation

Any creditor of a struggling company can petition for its winding up through the courts if it owes them £750 or more. This leaves businesses exposed to the risk of compulsory liquidation if they don’t act quickly.

The outcome of compulsory liquidation is the same in that the business closes down. As a director, however, you could face serious allegations of misconduct if you’ve allowed your business to trade whilst insolvent.

It’s always advisable to seek professional support quickly if your business is in financial difficulty - it mitigates the risk of inadvertently trading wrongfully, and protects the interests of creditors which is something you are required to do by law as the director of an insolvent company.

If your company is solvent, and has straightforward business affairs with few assets, you may be eligible to close down via voluntary dissolution.

Company dissolution

Company dissolution is a closure method that’s initiated and carried out by the directors. It’s only suitable for solvent businesses, and you must take great care to ensure that all creditors are informed of the closure. If your company has in excess of £25,000 worth of assets, however, opting for an MVL rather than strike off is likely to be a more tax-efficient way of closing the company

With company strike off, business affairs are wound down and once an application for voluntary strike-off is accepted by Companies House, a Gazette notice informs any creditors of the intended dissolution.

Voluntary dissolution can be appropriate for dormant companies, but if your company has been active in recent times, you need to be certain that it’s solvent before proceeding. If it’s later found to be insolvent, the company can be restored to the register and you'll face investigation by the Insolvency Service.

How do you know if a company is solvent or insolvent?

Cash flow test

The cash flow test for insolvency is based around a business’ ability to pay its liabilities as they fall due. If you’re having trouble paying your staff, HMRC, or suppliers, your company may be insolvent.

Balance sheet test

The balance sheet test involves comparing the level of your company’s liabilities, including contingent liabilities, against its total assets. If liabilities exceed the value of its assets, your company is balance sheet insolvent.

Legal action test

The legal action test for insolvency aims to identify any outstanding statutory demands for payment, or other unpaid court judgments that have been made against the company. Any threats of legal action - or any ongoing legal action - signifies a risk that the company may be wound up by a creditor.

Carrying out these tests can help you identify the best way to close your company, however, you should always contact a licensed insolvency practitioner if you believe your company is insolvent, or is on the road to soon becoming insolvent. Seeking assistance from a licensed insolvency practitioner ensures the company is closed in the correct manner, and that creditors are treated fairly.

UK Liquidators will provide further guidance tailored to your own company. We offer free, same-day consultations, and operate a wide network of offices around the UK.