Closing a company is often the last thing directors would want to do. After all, every director wants to see their business thrive and grow, right? Well, despite those best intentions, and as counterintuitive as it may sound, there are instances where closing a company might be the best option. This could be to limit the damage if the company is insolvent or if the directors’ or economic circumstances have changed, so the company is no longer a viable enterprise.
So, when might directors be better off closing a company rather than continuing to trade?
Its liabilities outweigh its assets
When a company has more money going out than it has coming in, it can be indicative of deeper-rooted problems. If the company has insufficient cash or assets to cover its outgoings as and when they fall due, it could be insolvent.
As a director, you should speak to a licensed insolvency practitioner as soon as you become aware that your company is insolvent. They can guide you through what options are available depending on your circumstances. If you act quickly enough, you may be able to keep the company alive and even trade on while repaying what it can afford. (Whether this is possible depends on which process the insolvency practitioner deems best for the company).
Failing to act before the problem escalates reduces the likelihood of a desirable outcome. If you’re found to have traded whilst insolvent, it could even see you being held personally liable for the company’s debts.
Creditor pressure is mounting
Along with an imbalanced cash flow, mounting creditor pressure is another tell-tale sign that the company could be insolvent.
If you start receiving repayment reminders from creditors and even debt collectors, DON’T ignore them. Left unaddressed, creditors could issue statutory demands and even County Court Judgements (CCJs) to reclaim what you owe them. These stay on your company’s credit file for six years, making it harder to take out any finance going forward. Continuing to ignore any CCJs can lead to visits from bailiffs. In the worst-case scenario, creditors could even issue a winding-up petition. A winding-up petition can be issued for debts larger than £750, and once advertised in the appropriate Gazette, the company’s bank can freeze its accounts, making trading impossible.
The company has no viable future
On top of being unable to repay its debts, the company may just not be viable anymore.
This could be due to financial pressures but could also relate to the changing economic landscape or the directors’ personal circumstances. The directors may wish to retire with no successor or might not want to sell the business to a third party.
Equally, the company’s audience or market could no longer exist, or it has changed so drastically that the company is unable to adapt to keep up with those changes.
So, how do you close your company?
Before setting your heart on liquidation, you should speak to a licensed insolvency practitioner (IP). A licensed IP can spell out the options available to you depending on the company’s circumstances; not all arrangements will be suitable for your company. Even if the company is insolvent, there may be other ways to solve the problem rather than just closing. Repaying the debt in instalments could be an option, along with restructuring the company to return it to a profitable state. However, if the situation is so dire that the company is unlikely to come out the other side, you may be best closing the company through a Creditors Voluntary Liquidation (CVL). This process draws a line under the insolvent company and its debts, allowing the directors to walk away or start a new limited company.
Liquidation may be a suitable option for your company, even if it’s solvent. While you can apply to dissolve the company by striking it off the register at Companies House, if the company has more than £25k to release, they could explore a solvent Members Voluntary Liquidation (MVL), which can allow directors to take advantage of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief).
Although closing the company might sound like the last thing directors would want to do, depending on the circumstances, it might be the best course of action. If the company’s cash flow is imbalanced and the liabilities outweigh its assets, creditors have started initiating legal action to recover what the company owes them, and the company no longer has a viable future, it might be time to consider closing the doors.
Insolvency doesn’t have to be the deciding factor if you choose to close the company. Although not the only way to draw a line under an insolvent company’s debts, closing the company through a voluntary liquidation is generally preferable to leaving the creditors to wind up the company and force it into compulsory liquidation.
If the company has reached the end of its useful life or the directors wish to retire with no one else to continue the business, they can put the company into a solvent liquidation.