Ways To Close A Company
Dissolution
‘Dissolution’ or ‘Striking Off’ a company means updating the register at Companies House to show that the company has been dissolved, this means the company no longer exists.
Dissolution can either be voluntary, because you decide to close the company or, in limited circumstances, it can be forced on the company, a ‘compulsory strike off’. The Registrar of Companies may issue a notice of compulsory strike-off because the company has not complied with certain legal requirements such as filing the company accounts on time, submitting annual confirmation statements and paying any fees or penalty fees due.
You can only voluntarily dissolve a company if it is solvent, i.e. can pay all of its debts. It is not a way of the company avoiding paying its debts. The company must not have traded or changed its name for at least 3 months prior to dissolution.
To apply for dissolution the directors must submit a DS01 form to Companies House. No funds are paid to shareholders or creditors upon dissolution, so it is important to ensure all debts and assets of the company have been properly dealt with before applying. If there are any outstanding liabilities those creditors can either accept the closure of the company, effectively writing off the debt or object to the dissolution.
If the dissolution application is approved, the company bank account will the frozen and any credit balance in the account and other assets will pass to the Crown. After dissolution the company ceases to exist.
Members Voluntary Liquidation
A Members Voluntary Liquidation (MVL) is only available to solvent companies. In this context this means that the company must be able to pay all of its debts, including any outstanding tax liabilities within 12 months.
The directors must swear a declaration of solvency and an Insolvency Practitioner is appointed as Liquidator by the Shareholders. The liquidator will work alongside the directors and shareholders to realise company assets and pay creditors in full. Once all creditors have been paid the Liquidator will distribute the remaining value of the company to the shareholders.
If the company has significant assets there are tax advantages to closing the company using an MVL rather than dissolution.
Creditors Voluntary Liquidation
A Creditors Voluntary Liquidation (CVL) is the most common process in the UK for insolvent companies, who are unable to recover from their financial difficulties, to deal with their affairs. Monthly Insolvency Statistics are published by the Insolvency Service and can be found here: https://www.gov.uk/government/collections/monthly-insolvency-statistics.
The Directors take the decision to liquidate the company and appoint a liquidator, who must be a licenced Insolvency Practitioner. Creditors will then ratify the appointment or, where they deem it appropriate, appoint their own choice of Liquidator.
The Liquidator’s duty is to achieve the best possible outcome for creditors as a whole and this will involve realising all of the company’s assets. Following the appointment of the Liquidator the powers of the directors will cease, all trading must cease, and all employees will be made redundant.
The Liquidator has a duty to investigate and report on the causes of the company’s financial difficulties and the conduct of the directors. The Liquidator must report their findings to the Insolvency Service, if the company insolvency has been caused, or has not been addressed appropriately, by the directors, then they may be liable to prosecution for certain offences or breaching certain statutory obligations.
In general, the directors of a company have a duty to maximise the company profits and increase shareholder value. However, at any time the company becomes insolvent or is likely to become insolvent, the directors’ primary duty changes and they must act in the best interest of the company creditors, protecting assets where possible and preventing creditors from incurring or suffering any further losses. Therefore, it is important that they do not continue to trade the business when it is insolvent, trading whilst the company is insolvent could result in prosecution for Wrongful Trading or Fraudulent Trading. There are very few defences available against such claims and if the director is deemed to have breached their duties, they can become personally liable for all or part of the company debts by order of the Court.
Once the Liquidator has completed their investigations, realised all the company’s assets and distributed all funds they will file their final report at Companies House and the company will be dissolved 3 months later.
Any debts which were solely the company’s responsibility will be written off when the company is dissolved. However, if any party is jointly liable or has provided a personal guarantee to any of the company debts, those debts will remain payable by that party. Any personal guarantee will have crystalised when the company entered liquidation.
Compulsory Liquidation
Any interested party can apply to the court for a company to be wound up / liquidated by order of the Court and it does not matter whether the company is solvent or insolvent, although being unable to pay its debts is one of the available grounds for a petition. Examples of parties who may choose this route are; a government agency wanting to close the company on grounds of public interest, or a director or shareholder who believes their company is insolvent but is unable to convince the board of directors to follow the CVL procedure.
If the Court agrees with the applicant and makes an Order for Compulsory Winding up of the company, the Official Receiver (OR), will automatically be appointed Liquidator as an officer of the Court. The OR may remain the Liquidator throughout the process but for various reasons creditors or the OR themselves may request that an alternatively Insolvency Practitioner is appointed Liquidator.
The involvement of a Court application, Court hearing and the initial appointment of the OR as Liquidator generally make a compulsory liquidation a more expensive liquidation process. As such, it is considered by most to be a last resort liquidation.
Administration
Administration is typically considered when the company appears to have a viable business which could be rescued with some intervention or needs to continue trading to maximise the realisation of assets for the benefit of company creditors. Due to the extensive work required, the costs of Administration tend to be high, and Administrations are therefore usually considered by larger companies with funds or assets available to pay these costs in an attempt to rescue the company.
During the Administration period, creditors are prevented from taking any action to recover their debts unless they obtain permission from the court.
The Administrator, who must be a licenced Insolvency Practitioner, can be appointed by the directors and shareholders of the company (but must give notice to certain company creditors) or the holder of a floating charge over the company’s assets.
The Administrator must believe that they can achieve one of the three statutory purposes of Administration, these being;
To rescue the company as a going concern
To achieve a better result for the company’s creditors as a whole than would be likely if the company were wound up (without first being in administration)
To realise property in order to make a distribution to one or more secured or preferential creditors.
Following the appointment, the Administrator will prepare and deliver a proposal to all interested parties setting out how the intended statutory objective will be achieved, the actions to be taken and the overall strategy to exit the Administration. Typically, the objective should be obtained within the automatic 12-month Administration period, unless the Administrator thinks it is necessary to extend this period and obtains the permission of the creditors or the Court.
At the end of the Administration, the company will either:
Be returned to directors in a solvent position;
Be returned to the directors subject to an a CVA (see below); or
Enter into a CVL to deal with any residual company assets and liabilities.
Company Voluntary Arrangement
A Company Voluntary Arrangement (CVA) is a binding agreement between a company and its creditors.
A CVA requires a licenced Insolvency Practitioner to act as Nominee and then Supervisor but, unlike other insolvency options, the directors remain in control of the company.
CVAs are a flexible solution which can include a variety of terms dependant on the company’s situation. Examples of terms which may be included in a CVA are delayed or reduced payments of debt over a set period of time, capital restructuring, or an orderly disposal of assets. In cases where a company has a number of sites, for example a retail chain with multiple shops, a CVA may be used to terminate lease agreements on poorly performing outlets, and/or to reduce rents on remaining sites in order to ensure the ongoing survival of the company.
If the CVA is successful, the company will likely exit the CVA in a solvent position. However, if the terms of the CVA cannot be complied with, the company may need to enter into a CVL.
Comparison
| Company Voluntary Arrangement (CVA) | Administration | Creditors Voluntary Liquidation | Members Voluntary Liquidation | Compulsory Liquidation |
Insolvency practitioner appointed by? | Creditors | Director(s)/Company, Qualifying Floating Charge Holder or Court | Creditors | Shareholders | Creditors, Court or Insolvency Service |
Insolvency practitioner’s role? | Nominee (pre-approval) and Supervisor (post-approval) | Administrator | Liquidator | Liquidator | Liquidator |
Who is the insolvency practitioner accountable to? | Per the Proposal, usually the general body of creditors | General body of creditors | General body of creditors | Shareholders | General body of creditors |
Does the insolvency practitioner have control over assets? | No, unless specified in the proposal | Yes | Yes | Yes | Yes |
Do directors’ powers cease? | No. Directors remain in control | Yes. However, a director is obliged to co-operate with the administrator | Yes. However, a director is obliged to co-operate with the liquidator | Yes. However, a director is obliged to co-operate with the liquidator | Yes. However, a director is obliged to co-operate with the liquidator |
What debts and creditors will be affected? | Dependent on the terms of the proposal. Ongoing liabilities will generally need to be met whilst historic liabilities are compromised. There are legal complexities around the treatment and claims of landlords | All debts will be affected and dealt with by the process | All debts will be affected and dealt with by the process | All debts will be affected and dealt with by the process | All debts will be affected and dealt with by the process |
How else will a director be affected? | A proposal usually makes a declaration that, “to the best of the directors’ knowledge, there are no circumstances giving rise to actual or potential claims under the Insolvency Act 1986*”, in the event of the company subsequently entering liquidation. | An administrator or liquidator of an insolvent entity has a duty to investigate what assets there are (including potential claims against third parties including the directors) and what recoveries can be made. A directors’ conduct report is then filed with the Secretary of State. An administrator or liquidator has powers to take action against directors for misconduct including misfeasance, wrongful trading, failure to comply with duties under the Companies Act, preference payments, and many more actions deemed inappropriate | |||
How long does the process last? | Decided on a case by case basis, normally proposed to last between 2 to 5 years | 12 months unless extended by the administrator with the consent of creditors or the court | Dependent on complexity of case. No fixed time period | Dependent on complexity of case. No fixed time period | Dependent on complexity of case. No fixed time period |
When does the process end? | The company continues to operate following completion of the voluntary arrangement | If the company is rescued as a going concern, it will continue to operate as normal after administration. If no rescue is achieved, the company is dissolved at Companies House | The company is dissolved at Companies House | The company is dissolved at Companies House | The company is dissolved at Companies House |
Who agrees the fees of the insolvency practitioner? | In most circumstances, fees and expenses in relation to the services of the nominee and supervisor are initially agreed with the company. The creditors decide whether to agree the terms relating to fees along with the other provisions of the proposal | It is for the creditors’ committee to approve. If there is no creditors’ committee, fees may be fixed by a decision of the creditors. As a last resort, the court can approve fees | It is for the creditors’ committee to approve. If there is no creditors’ committee, fees may be fixed by a decision of the creditors. As a last resort, the court can approve fees | The Shareholders. | It is for the creditors’ committee to approve. If there is no creditors’ committee, fees may be fixed by a decision of the creditors. As a last resort, the court can approve fees |
How are creditors paid? | In most circumstances, creditors are paid from contributions as detailed in the proposal | Where possible, creditors are paid dividends from the sale of the company’s assets. | Where possible, creditors are paid dividends from the sale of the company’s assets. | Where possible, creditors are paid dividends from the sale of the company’s assets. | Where possible, creditors are paid dividends from the sale of the company’s assets. |
