Dissolving a Company
Are your company’s financial problems growing? When your company faces serious pressure from its creditors and lacks the resources and cash flow to repay them, it’s often best to dissolve the company and liquidate its assets.
Dissolving a limited company is relatively straightforward and can be completed in a number of ways. Companies can be liquidated and dissolved by court order from a creditor or voluntarily by the company’s directors or shareholders. When a company is dissolved, its assets are liquidated in a liquidation sale to repay its creditors or compensate its shareholders. There are many different reasons for a company to be dissolved, not all of which involve creditor pressure.
In this guide, we’ll cover the process of dissolving a limited company, whether it’s to extract value from the company in the form of capital gains, liquidate the company’s assets to repay its creditors or at the initiation of a creditor’s winding up order.
Dissolving a company via members’ voluntary liquidation
If your company is commercially viable but you would no longer like it to continue operating – for example, if you wish to retire and extract the value of the company’s assets – you can dissolve it through a members’ voluntary liquidation (MVL). An MVL involves the shareholders of the company deciding to dissolve it in order to liquidate its assets. These assets are then extracted in the form of capital gains. This often reduces the amount of tax the earnings from company assets are subject to. Not all companies are eligible for members’ voluntary liquidation. In order to close your company and liquidate its assets via an MVL, your company needs to comply with certain criteria:
- It must be financially solvent and able to pay current debts to its creditors, including suppliers and lenders.
- It must be able to prove that it is capable of repaying all of its creditors within a period of 12 months or less.
- The value of the company’s assets, such as property or bank account funds, must exceed the aggregate value of its liabilities.
The biggest advantage of dissolving your company through an MVL is that it allows you to extract its value in cash without being subject to income taxes; instead, all of the income from an MVL is subject to a capital gains tax.
Launching the MVL process is relatively simple. You, and other shareholders in the company, will need to prepare a declaration of solvency. This is a document noting that your company is solvent and able to repay its creditors within 12 months. A liquidator is then appointed to manage the sale of your company’s assets and the procedure of liquidating assets begins, allowing you and other shareholders to easily dissolve your company.
Dissolving a company through creditors’ voluntary liquidation
If your company is solvent at the time of its liquidation and capable of repaying its creditors in full, an MVL is typically the best option. However, if your company isn’t solvent, it will not be able to be dissolved using the MVL procedure.
A creditors’ voluntary liquidation (CVL) is a form of business liquidation in which your company’s directors voluntarily wind up the business and liquidate its assets in order to raise funds to make a return to its creditors. A CVL is suitable for insolvent companies under creditor pressure. The CVL process involves speaking to an insolvency practitioner, reviewing the options available to your company and, if appropriate, starting the liquidation process.
In the event that your company is insolvent and owed money to creditors, it’s vital that you act in the best interests of its creditors. If liquidation is not the best option for your company’s creditors, your company may need to consider an alternative. Alternatives to a CVL include entering into a company voluntary arrangement (CVA) to repay creditors, entering into administration to restructure the company or using emergency financing to recapitalise the company and continue trading.
If a creditors’ voluntary liquidation is found to be the best option for creditors, your insolvency practitioner will meet with the creditors in to appoint the liquidator and initiate the process of selling your company’s assets and closing the business.
Dissolving a company and allegations of wrongful trading
In the event that your company becomes insolvent, you’re required by law, as the company’s director, to fulfil your director’s duties. These include ceasing trading immediately when you become aware of your company’s insolvency. During the liquidation process, the liquidator will investigate your company to see that you (and other directors) did not trade wrongfully or fraudulently. Wrongful trading charges can result in personal liability and a range of serious penalties.