How to liquidate a company – a small business guide

If you’ve worked hard to build a business, it can be a difficult decision when choosing to liquidate. Yet sometimes ‘winding up’ can be the only option available. Winding up and liquidation essentially refer to the same thing: closing a company, making sure all of its affairs are dealt with legally, and removing it from the companies register with Companies House.

Limited company directors might choose to liquidate a company for different reasons. And the company might be able to use its assets to settle its debts (meaning it’s solvent), or it might not (meaning it’s insolvent).

But how do you liquidate a company? And is it better to strike it off instead? Keep reading to learn more about closing a company.

• Active proposal to strike off
• Winding up a company: how to liquidate
• What does liquidation of a company mean for company directors?

Active proposal to strike off

An active proposal to strike off is used by Companies House to note that the process to remove or dissolve a company has begun. If your company is solvent but no longer active and you want to close it, you can strike it off the companies register. This will dissolve your company.

Keep in mind there’s a difference between a dormant company and a dissolved company.

If you think you’ll use your company in the future, you might want to simply tell HMRC it’s dormant (you’ll still need to file annual accounts and your confirmation statement).

But if you want to close a business completely, you can strike it off the companies register and dissolve it, as long as it:

• hasn’t traded or sold off any stock in the last three months
• hasn’t changed names in the last three months
• isn’t threatened with liquidation
• has no agreements with creditors, like a Company Voluntary Arrangement (CVA)

You have legal obligations before striking off your company, for example telling HMRC, treating your employees according to the rules, and dealing with your business assets and accounts.

Striking off a company can be the simplest way to close a business, as company directors can complete the process themselves. However, if the conditions for striking off your company don’t apply, you’ll need to liquidate it instead.

Winding up a company: how to liquidate

Liquidating a company is also called winding up a company. The process is different depending on whether your business is solvent or insolvent.

During business liquidation, a company’s assets will be used to pay off its debts and leftover money will go to the shareholders.

There are three different types of liquidation, depending on whether or not your company can pay its debts. Creditors can also force your company into liquidation.

Closing a business has many legal obligations and implications, so it’s important to get professional advice on the process.

Members’ voluntary liquidation (if your company can pay its debts)

If your company is active and solvent but you don’t want to run it anymore, you could choose members’ voluntary liquidation.

It could be that you want to retire, or you’d like to step aside and can’t find anybody else to run the business.

After you’ve reviewed the company’s assets and liabilities, English and Welsh companies should make a declaration of solvency, while Scottish companies should ask the Accountant in Bankruptcy for form 4.25. You’ll need to include your company’s assets and liabilities in your declaration.

And when making the declaration, you have to write a statement saying the directors believe the company can pay its debts, with interest.

A declaration of solvency should include:

• your company name and address
• the names and addresses of the company directors
• how long it’ll take the company to settle its debts (this can’t be more than 12 months)

Following this, you should:

• ask the majority of directors to sign the declaration in front of a solicitor or ‘notary public’ (a qualified lawyer who is responsible for authenticating legal documents)
• call a general meeting with the shareholders within five weeks and pass a resolution to wind up the company
• appoint an authorised insolvency practitioner as a liquidator at the general meeting
• within 14 days of the meeting announce the resolution in The Gazette (the official public record)
• within 15 days of passing the resolution send the signed declaration to Companies House or form 4.25 to the Accountant in Bankruptcy (Scotland)

Creditors’ voluntary liquidation (if your company can’t pay its debts)

While company directors will never want to be in this situation, if your business can’t pay its debts and there’s no hope of turning it around, you could choose company insolvency.

You can determine whether your business is insolvent in two ways. If it’s cash flow insolvent, the business can’t meet its liabilities when they’re due. If it’s balance sheet insolvent, its liabilities outweigh its assets.

Creditors’ voluntary liquidation gives company directors a degree of control over when and how they liquidate the company.

That’s because a company is sometimes faced with a winding up petition and compulsory liquidation from creditors (more on those below). Choosing creditors’ voluntary liquidation at an earlier stage means that you can appoint a liquidator yourself.

The company’s assets will be used to pay off debts and minimise creditor losses, but creditors are likely to face a shortfall.

Shareholders will need to agree to a creditors’ voluntary liquidation:

• call a meeting of shareholders and ask them to vote
• 75 per cent of shareholders (by share value) need to agree to the winding up resolution
• once agreed, appoint an authorised insolvency practitioner as a liquidator
• within 15 days of passing the resolution you need to send it to Companies House
• within 14 days of passing the resolution you need to announce the resolution in The Gazette (the official public record)

Compulsory liquidation (winding up petition)

If your company can’t pay debts of £750 or more and enough shareholders agree, a company director can apply to the court for a winding up order. This means the company should stop trading and be liquidated.

But compulsory liquidation is often forced by creditors when a company owes them money. The process involves sending a winding up petition to the court, which is made up of two forms – Comp 1 and Comp 2.

Because compulsory liquidation is often forced, limited company directors usually want to avoid this route.

So it’s important to be realistic about your company’s financial situation – creditors’ voluntary liquidation should give you more control over winding up your company.

Here’s the compulsory liquidation process for company directors:

• 75 per cent of shareholders (by value) need to agree to the winding up resolution at a shareholders meeting
• complete the winding up petition with all the necessary details
• send the winding up petition with form Comp 2 and the winding up resolution to the court
• pay the fees – it costs £2,600 to submit the petition and £280 for a court hearing
• if the court accepts the winding up petition, you need to give a copy of the petition to your company and tell the court when you’ve done this
• place an advert in The Gazette at least seven days before the hearing and give the court a copy of the advert and the certificate of service
• you or your solicitor needs to attend the hearing – if the court issues a winding up order, it puts someone in charge of liquidation

What does liquidation of a company mean for company directors?

Business liquidation has implications for company directors.

Once a liquidator is appointed, company directors have no control over the company and its assets. They also can’t act on the company’s behalf.

Company directors also need to cooperate with the liquidator – this might mean:

• giving them information
• handing over assets, records, and paperwork
• letting the liquidator interview you

Liquidators can also determine whether a director’s conduct was unfit, which could lead to a ban on being a director for two to 15 years.

If your business has gone into compulsory liquidation or creditors’ voluntary liquidation, there’s also a five-year ban on forming, managing or promoting a business with the same or similar name.

Would you like any further information about closing a company? Let us know in the comments below.

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