While closing a company is likely low on the director’s priority list, there can be scenarios where it’s in the business’s best interest. Whether it’s because of an unmanageable amount of debt or the directors can’t see a future in the company, closing it may be in the concerned parties’ best interests.
Your company is insolvent and cannot repay its debts
A company is insolvent if its liabilities outweigh its assets, and the debts cannot be paid when they fall due. If this is the case and there’s no feasible way of alleviating the debts and keeping the company open, you could be better off closing the company voluntarily rather than waiting for the creditors to initiate winding-up action.
Although your instincts as director can drive you to try and keep the company open, this could cause harm if the company continues trading without the necessary action to alleviate the debt. You could face severe repercussions once a liquidator intervenes. These could include investigation for insolvent trading or even wrongful or fraudulent trading if a liquidator calls your actions as director into question.
If you spot the early warning signs and take necessary action before things escalate, closing the company might not be your only option. Depending on the amount owed and who the creditors are, the company could try to repay its debts in monthly instalments at a rate it can afford. This process is called a CVA (Company Voluntary Arrangement). Managed by a licensed insolvency practitioner, they allow a company to repay its unsecured debts while continuing to trade, improving cash flow while repaying the debt.
Other debt relief attempts have failed
Sometimes, trying to alleviate the company’s debts might not be enough to save it. The volume of debt could be of such a level that repayments and restructuring action wouldn’t be feasible, or your creditors have pursued winding-up action to force the company into compulsory liquidation. Should this happen, you would be better off closing the company voluntarily through a process called a CVL (Creditors Voluntary Liquidation). This process allows the company to close in a more orderly manner than compulsory liquidation, and directors have more control over the process.
Even after an insolvent company closes via liquidation, directors may be able to repurchase the company assets and continue the business in a new limited company.
However, directors may receive a ban if they’re found to have failed in their directorial duties or to have committed wrongful or fraudulent trading.
The company has no future
A company doesn’t have to be insolvent to be in a position where it would be better off closing. If the company has cash at the bank but could soon find itself in a position where it is no longer viable, either because of an outdated business model or if it caters to a declining market, closing might be a better option before its outgoings start outweighing its income. You can do this by approaching a licensed insolvency practitioner to apply for an MVL (Members Voluntary Liquidation).
An MVL involves the selling of company assets, with the proceeds used to pay the liquidator’s fees and any remaining creditors. Any monies left are then distributed to the company’s shareholders.
You wish to retire with no successor
Similarly, if you are a company director and wish to retire without a successor or a plan for the business afterwards, you can close via an MVL as a tax-efficient alternative to a company dissolution. Closing via an MVL allows directors to apply for Business Asset Disposal Relief (formerly Entrepreneurs’ Relief), enabling a tax-efficient distribution of company assets and profits to its directors and shareholders.
To summarise
Although directors may instinctively want to keep their company open, you might be in a situation where it’s better to close up shop and walk away. The company doesn’t have to close if it’s insolvent; you may be able to explore other debt-relief options that allow the company to continue trading while repaying its debts in affordable instalments. However, if the debts are of such a level that relieving them is unfeasible, you’ll have more control over the closure and reduce the risk of severe consequences if you close through a voluntary liquidation. Doing so puts you in a preferable position than if you allowed creditors to wind up the company through compulsory liquidation.
Insolvency isn’t the only scenario in which liquidation would be a suitable outcome. If the company is profitable, but the directors wish to retire or feel it has come to the end of its useful life, they can choose to close the company through a solvent Members Voluntary Liquidation. These allow for a more tax-efficient distribution of the company’s assets compared to a dissolution.
