We explore the closure methods for solvent and insolvent businesses
If you’ve decided it’s time to close your limited company in Scotland, there are several ways you can go about it. The right option for you will depend on whether your business is solvent (it can repay all its debts) and the level of assets and retained profits you want to release.
In this article, we’ll guide you through the limited company closure options and what they might mean for you. And if you’re not sure how to proceed, you can contact our experts for free and confidential advice.
Why do you want to close your company?
There are many reasons why the time might be right to close your limited company. You may want to retire and there’s no one to carry the business on, or you could be ready to start something new. On the other hand, the company may no longer be profitable and have debts that you’re struggling to repay. Whatever the reason, understanding how to close a limited company enables you to draw a line under it and move on.
How do I close a solvent limited company?
If your company can pay all its debts (it’s solvent), you close it in one of two ways. You can:
- apply to strike the company off the Companies Register; or
- enter into a Members’ Voluntary Liquidation (MVL).
The cheapest option is usually to apply to strike the company off. However, if the company has significant retained profits and valuable assets, it might be more cost-effective to close it via an MVL.
How do I close an insolvent company?
If your limited company has debts it cannot afford to repay (it’s insolvent), there are two company closure methods you can use. You can:
- arrange a Creditors’ Voluntary Liquidation (CVL); or
- wait for a creditor to close you down via a Compulsory Liquidation.
In a Creditors’ Voluntary Liquidation, the directors close the company voluntarily. Compulsory Liquidation, on the other hand, is forced on the company by a creditor (someone you owe money to) who will apply to the court to wind the company up.
Closing a solvent company via Strike Off
Striking your business off the Companies Register is low cost. You have to submit form DS01 along with a £10 filing fee, and as long as you meet all the requirements and the form is signed by a majority of the directors, the company will be struck off the register and will cease to exist.
Before you apply for Company Strike Off, also known as Voluntary Dissolution, there are a few steps you must take to prepare the business:
- Complete all outstanding work and collect any payments due
- Pay staff their final wage and make them redundant
- Pay any outstanding debts
- Sell or transfer any company assets and distribute the proceeds to the shareholders
- Prepare final company accounts
- Submit final tax returns and pay any tax due
- Close your payroll and deregister for VAT
- Close the company bank accounts
As long as the company has not traded or changed its name in the last three months, has no outstanding debts and is not subject to any ongoing legal proceedings, you can apply to strike it off.
Closing a solvent company via a Members’ Voluntary Liquidation (MVL)
If your company has significant retained profits and assets to distribute to the shareholders, a Members’ Voluntary Liquidation is likely to be more tax-efficient. In an MVL, the directors must sign a Declaration of Solvency stating that the business can repay its debts in full. You must also pass a special resolution, which requires 75% of the company’s shareholders to vote in favour of the company’s closure.
The next step is to appoint a licensed Insolvency Practitioner to act as the liquidator. They will take control of the business and manage its winding up. They will sell the company’s assets and distribute the proceeds to the company’s shareholders before closing it down.
You will have to pay the liquidator a fee for their work, with an MVL typically costing upwards of £2,000 plus VAT. However, as long as you have around £35,000 of retained profits and assets, it should be more cost-effective than Strike Off. That’s because the proceeds of an MVL are taxed as capital rather than income, and you may also be eligible for Business Asset Disposal Relief.
Closing an insolvent company via a Creditors’ Voluntary Liquidation
If your company cannot afford to pay all its debts (it’s insolvent) and you want to close it down, you can do so by entering a Creditors’ Voluntary Liquidation. You will need to hold a general meeting of the company’s shareholders to pass a special resolution to wind the company up. You can then appoint an Insolvency Practitioner to act as the liquidator.
The liquidator will sell the company’s assets and distribute the proceeds to your creditors in order of priority. They’ll then strike the company off the register and any remaining debts will be written off. A CVL typically costs upwards of £3,000 depending on its complexity, although you may be eligible for director’s redundancy pay which will help to cover the fee.
Closing an insolvent company via Compulsory Liquidation
If a creditor has made multiple attempts to collect a debt without success, they can ask the court to wind the company up by issuing a Winding Up Petition. If you do not repay the debt or challenge the petition, the court will make a Winding Up Order that forces the company into liquidation.
Once the Winding Up Order has been made, an Insolvency Practitioner will be assigned to act as the liquidator. They will sell the company’s assets to repay your creditors and any remaining debts will be written off. The company will usually be struck off after around three months.
As part of the process, the liquidator will investigate your conduct as a director, and it will be a more thorough investigation than in the case of a Creditors’ Voluntary Liquidation. If they find any evidence of misconduct or wrongful or fraudulent trading, you could be made personally liable for company debts or be disqualified from acting as a director for up to 15 years.
Can I make my company dormant?
If your company is solvent, you don’t necessarily have to close it down. If there’s a chance you may need the company again in the future, you could choose to make it dormant. A dormant company cannot trade or engage in any business activity, but it continues to be listed at Companies House and you can revive it at any time.
You can make your company dormant by applying to Companies House and notifying HMRC. You must also submit dormant accounts and a confirmation statement to Companies House every year.
Need advice?
At Scotland Debt Solutions, our experts can help you determine the best way to close your limited company, whatever your circumstances. Contact us today for a free, same-day consultation or arrange an in-person meeting at one of our five offices located across Scotland.
