Closing a limited company

If you are looking to close your limited company and wind up its affairs, you may be wondering about the best way to bring your business to an end. There are various to close your limited company, and much of this will depend on if the company is solvent or insolvent at the time of closure.

What are the different ways to close a limited company?

There are different ways to close a limited company depending on whether the business is solvent or insolvent. 

If your company is solvent – meaning it does not owe any company, individual, or HMRC any money – then you can close the business through a solvent Members’ Voluntary Liquidation (MVL). All assets of the company will be distributed to shareholders as capital gains as part of the liquidation process.

If your business has debts that it cannot afford to repay, however, and is therefore classed as insolvent, the company closure process is different. You can still close an insolvent company that owes money to HMRC or other creditors, however, this will need to be done through an alternative liquidation process - a Creditors' Voluntary Liquidation.

How do I close an insolvent limited company with debts?

Closing a company with debts is achieved through a process known as a Creditors’ Voluntary Liquidation – or CVL for short. This formal company closure process allows a limited company director to wind up their company voluntarily, while ensuring outstanding creditors are treated fairly and in accordance with the Insolvency Act 1986.

Closing a limited company through a CVL can only be done under the guidance of a licensed insolvency practitioner. Once appointed, trading will immediately cease, and it will then become the responsibility of the insolvency practitioner to handle the company’s affairs from that point onwards.

This includes identifying and realising the value of company assets, dealing with creditors of the business, and ensuring the company is closed down in the correct way at Companies House. Creditors will be repaid as far as possible using the liquidated assets of the company, with any debt remaining outstanding after this point being written off unless it has been secured with a personal guarantee. 

In the event of a personal guarantee being in place, the guarantee will crystalise upon the company being closed, and the responsibility for repaying the remaining balance of the borrowing will pass to the individual who gave the guarantee. 

How do I close a limited company at Companies House by strike off?

A company can also be closed by applying to have it dissolved and struck off the Companies House register. This is an informal business closure process and striking off is only suitable for those companies without debt.

Dissolving a company in this way may be suitable for those limited companies which have never traded or are otherwise dormant. If your company does not owe any money and has minimal assets, winding the business up and dissolving it at Companies House could be a way of achieving closure in a time and cost-effective manner.

In order to close a company via the strike off process, a strict set of criteria must first be met. The business must not have traded, changed its name, or sold any property in the three months prior, nor must there be any ongoing legal action against the company.

Once the DS01 application has been received by Companies House, a notice will be placed in the Gazette. If no creditors come forward to object, the company name will be removed from the register.

If your business has outstanding debts, however, company strike off will not be appropriate and you should take expert advice on how to close your company via a formal liquidation process instead.

How much does it cost to close a limited company?

How much it costs to close a limited company depends on which closure method is chosen. 

For an insolvent company, a Creditors' Voluntary Liquidation (CVL) can cost around £4,000 - £6,000, however, for more complex cases with more complex debt positions, this cost could be more. The fees associated with a CVL takes into account the need to appoint a licensed insolvency practitioner to conduct the process on your company's behalf. The cost also includes certain statutory requirements, such as placing Gazette notices, which the insolvency practitioner will be required to do as part of the process.

For solvent companies who opt for the strike off route, the cost is much less. This is because there is no requirement to appoint an insolvency practitioner; in fact, the whole process is done by the company directors themselves. 

What happens to debt when you close a limited company?

When a company is liquidated, outstanding creditors will be repaid using the proceeds from selling company assets. In the case of an insolvent company, however, there will not be enough money raised in order to fully pay each creditor what they are owed. In many instances, there is in fact a significant shortfall, meaning a substantial amount of company debt remains after the business has been closed following liquidation.

Any debt which remains after a company has been closed via liquidation will be written off in the vast majority of situations. This is because a limited company is classed as a separate legal entity meaning the debts of a limited company belong to the company itself and not its directors. As the company has been closed via liquidation under the guidance of a licensed insolvency practitioner, you can be sure the closure of the business has been done in full accordance with the Insolvency Act 1986. 

The same cannot be said when a company is closed via the DS01 strike off option. Although this closure method should only be used by solvent companies, sometimes an insolvent company will apply for strike off and occasionally this will go through unchallenged.

In this instance, however, an outstanding creditor of the insolvent dissolved company can apply to the courts to have the company reinstated to the Companies House register in order for them to continue chasing for the debt which remains unpaid. You can only be sure unpayable debts of a company are written off and legally cleared by closing the company via liquidation. 

Can I be held personally liable for company debt when I close it?

As the company is responsible for its own debts, directors will not find themselves personally responsible for repaying these should the company have to close before all debts are repaid. This is due to something known as limited liability.

However, there are certain circumstances when the director of an insolvent company can be held personally liable for the debts of their limited company:

• Personal Guarantees - If a director or shareholder has provided a personal guarantee to underpin company borrowing, they will assume legal responsibility for repaying this debt should the company become insolvent and has to close. 
• Fraudulent trading - If a company director is found guilty of fraudulent trading, they may be asked to pay a compensation order to creditors in order to cover the financial losses they have incurred as a result of the fraudulent activity

Where can I get advice on closing my company?

Company closure is a complex area, particularly if your limited company has debts it cannot repay, which is why seeking early advice from a licensed insolvency practitioner is vital.

Continuing to trade while knowingly insolvent is a breach of your duties as a company director, however, closing your company in the wrong way, particularly one which is detrimental to your creditors, will also see you falling foul of your legal responsibilities as the director of an insolvent company.

An insolvency practitioner will be able to talk you through the options you have for winding up your business and bringing your company to a close in the best way possible.