There are several different ways to close a company, from Creditors’ Voluntary Liquidation (CVL) to Members’ Voluntary Liquidation (MVL). The best way for you will depend on your financial situation and whether your company is solvent or insolvent.
To help directors understand what paths are open to them, in this guide, Clarke Bells explains how to close a company in 2021.
How to close a company
Before we look at the best way to close a company, the first step is to look at your company’s finances.
After all, whether your company is solvent, meaning it has assets, can pay its bills and debts, or is insolvent, meaning its liabilities outweigh its assets and it can’t pay its bills and debts, will determine the best path forward for you.
If your company is solvent, a great way to close it is through Members’ Voluntary Liquidation.
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Members’ Voluntary Liquidation
An MVL liquidates the company, dealing with its assets and liabilities in the correct manner, before dissolving it and striking it off the Companies House Register. What is considered a great advantage of this route is that it is an HMRC approved, tax-efficient way of closing a solvent company.
This is because funds taken out of the business through the MVL process are subject to Capital Gains Tax, not Income Tax. This is great news for directors as Capital Gains Tax is set at a rate of just 10%, compared to Income Tax which is set at a rate of 18% at the basic rate and 28% at the higher rate.
Furthermore, there are additional benefits for businesses that are eligible for Business Asset Disposal Relief. This will mean that you can sell all, or just part of the company and you will pay just 10% in Capital Gains Tax on the profits you have made over the lifespan of the business. This is capped at a lifetime limit of £1 million. Find out more about Business Asset Disposal Relief here.
Just as it sounds, this is a hassle-free way to close a business that can save director’s a significant amount on their tax bill, which is why this is such a popular route with directors of solvent companies.
How to enter into an MVL
To enter into an MVL, the company must be solvent and usually has to have assets of £25,000 or greater.
This is a voluntary process that is always initiated by the company directors and shareholders. In order to progress with the MVL, the director must call a meeting with shareholders to initiate the process.
Once this meeting has been held, a licensed Insolvency Practitioner will then be appointed, who will carry out the process. This is a legal requirement due to the fact that an MVL is a formal insolvency process.
The Insolvency Practitioner’s job is to release the company’s assets, settle any outstanding legal disputes, pay creditors any outstanding amounts of money they are owed and then distribute the remaining funds amongst shareholders of the company.
Although this is a great way to close a solvent company, if your company is insolvent, a different set of options will instead be open to you.
Creditors’ Voluntary Liquidation
For an insolvent company, a Creditors’ Voluntary Liquidation will be the best route.
A CVL is another form of voluntary liquidation, however, it is a process open only to insolvent companies who no longer have a viable future.
A CVL allows a director of an insolvent company to close the company in a responsible way that fulfills the directors’ duties and meets their obligations towards creditors to which they owe money.
As we have mentioned, this is the best option for companies that owe creditors money and that therefore want to avoid being forced into compulsory liquidation if they fail to pay back their debts.
How to enter into a CVL
A CVL is a formal insolvency process. This means that an Insolvency Practitioner must be appointed to carry out the process to ensure that everything is handled in the correct, legal way.
Once appointed, the Insolvency Practitioner will gather the information they need to proceed from the company, which typically includes a list of creditors and copies of accounts.
A board meeting must next be held. Here, the directors will formally declare that the company is insolvent and can no longer trade.
Compulsory liquidation
If you do not act quickly and enter an CVL when your company is insolvent, the liquidation of your company might be taken out of your hands by a creditor.
If you have not started the CVL process, and the company owes creditors a sum of £750 or more, creditors can issue a winding-up petition to the court.
If successful, the court will issue the company with a winding-up order which forces the company into compulsory liquidation.
This is the most serious type of liquidation and results in a range of negative consequences for the director, from the director’s disqualification to being unable to utilise the services of solicitors and banks in the future.
That’s why it’s so important to act quickly at the first signs of insolvency, to ensure that options such as a CVL remain open to you and to avoid being forced into liquidation.
Clarke Bell is here to help
If your company is solvent and looking to close in a tax-efficient way, Clarke bell is here to help you with every stage of the MVL process.
However, if your company is insolvent and wants to know the best route forward, we will work closely with your company to advise on what’s best for you.
Our team of experts has helped thousands of businesses across the UK undergo liquidation, so you can ensure that you are in safe hands. To find out more, or for some free, initial advice, simply get in touch today.
