You may either be considering, or indeed be forced into a business closure without necessarily being sure of the correct process for dealing with the company. This may arise from:
- Loss of trade or contract
- Bad debt
- Loss of licence or other regulatory action
- Departure of key staff or individuals
- Death of an owner-manager
- Fire or flood damage, or some other insured event
These are two very different reasons for closing a company and as such have different regulatory requirements to be met. What do you need to consider?
Is the company solvent?
The first thing to consider is whether once all its debts are collected and any assets realised, the company is capable of paying its creditors in full or not.
If the company is insolvent
Where a company which has ceased trading and is not able to pay its creditors in full, you should take advice from an Insolvency Practitioner at the earliest opportunity since a CVL or other formal insolvency process may be appropriate and lead to a better outcome than awaiting on a Winding Up Petition from a creditor.
If the company is solvent
If the company is solvent, the correct process will depend on a number of variables, the principle of which is the value of the surplus assets (i.e. value once all creditors are paid) and the business owner’s intentions going forward.
Where the assets of a company exceed £25,000, a distribution of capital can only be made by a liquidator in a solvent liquidation (Members Voluntary Liquidation) process. As such, any monies withdrawn in excess of that amount would be taxed as dividend income, therefore potentially at a higher rate.
In certain circumstances, Entrepreneurs’ Relief, which is a lower (10%) tax rate, may be available on capital distributions. One of the prohibitions on claiming Entrepreneurs’ Relief is if the shareholder (or a person connected to them) carries on a similar trade through a company or partnership within two years of receiving a capital distribution; then that rate may not be available where trade is to be continued or re-started.
Entrepreneur’s Relief is also only available if assets are distributed within three years of the cessation of trade by a company. As such, you must be aware that the ability to claim the Entrepreneurs’ Relief rate would be lost if the company was to be left dormant for an extended period, so you may wish to consider taking early advice.
Can I just strike my company off?
For a solvent company which has closed (and paid off all its liabilities) it may be appropriate that the remaining assets and/or cash held is transferred the shareholder(s), and an application for strike off to be made when all assets are dealt with.
This is a straightforward and low-cost option, but all of the following criteria must apply:
- That it has not traded or sold off any stock in the last 3 months
- That is has not changed names in the last 3 months
- That it is not threatened with liquidation
- That it has no agreements with creditors, e.g. a Company Voluntary Arrangement (CVA)
It is important to note that there can be serious consequences for directors who make strike-off applications without adhering to the above.
Similarly, a company is struck-off without its assets being dealt with beforehand will result in them (and any money in bank accounts) being frozen and substantial costs needing to be paid to recover them.
It is important to follow the right process when closing down your business. If you would like to speak to one of our Partner’s and understand the correct process for closing down your business, contact us on 0800 634 4990.