Liquidation is a common method of closing a company, whether it be solvent or insolvent. It is a formal procedure that requires the appointment of a liquidator. They will be responsible for performing the liquidation, communicating with relevant parties, and distributing any proceeds to relevant creditors / shareholders. However, liquidation is not always the best option. For some companies, it is better to be wound up, or dissolved, rather than undergo a liquidation procedure. While appointing a liquidator is a prerequisite to liquidation, it isn’t quite so clear-cut for company dissolution.
In this article, Clarke Bell will discuss how winding up a company works, how it can be initiated, and whether winding up a company without a liquidator is possible.
What is winding up a company?
Winding up a company is one method of closing a company and having it removed from the Companies House register. This procedure, often referred to as company dissolution, is a commonly used alternative to company liquidation, and is often used instead of a Members’ Voluntary Liquidation (MVL) for companies with little in the way of retained profits. As such, it can only be used by solvent companies. Any attempts to try to put an insolvent company into dissolution will almost certainly be caught, and will likely carry significant penalties.
Similar to company liquidation, winding up a company can be voluntarily initiated by directors with a view to disposing of company assets, emptying accounts, and closing down the company for good. Once the decision is made, a notice will be published in the local Gazette informing the public of the decision. At this point, related parties, such as outstanding creditors, can object to the attempt at winding up the company.
Assuming no objections are made, the dissolution can begin. You should take care to remove any and all assets from your company and empty its accounts, as anything left will be considered “bona vacantia”, or without an owner. Essentially, this means that any remaining assets will be transferred to the Crown, as they cannot be owned by an entity that no longer exists. At the end, directors will be able to walk away from their old company, free to pursue new ventures, or retire.
Can I wind up my company without appointing a liquidator?
One key difference between company liquidation and company dissolution is that directors do not need to appoint a liquidator to wind up a company. They are free to initiate a company dissolution once a majority of directors agree on the course of action. The process can begin in full once a DS01 form is submitted. This form will cost £10 if done in paper format, or £8 if done through the Companies House online portal. As such, it is an incredibly affordable method of closing down a company.
Advantages of winding up a company
There are two key advantages of using company dissolution as an alternative to company liquidation. These are:
- Cost-effective – One of the most significant advantages to winding up a company is the procedure’s low cost. If carried out by a company’s directors themselves, the procedure can be very cheap, with only a small number of outgoings throughout the entire procedure.
- Retain control – Unlike in company liquidation, directors retain complete control over their company throughout the winding up procedure. This means that they can decide where assets go and what transactions are made.
Disadvantages of winding up a company
Although winding up a company can be advantageous in some instances, it has a number of significant disadvantages that make it inappropriate for some companies. These disadvantages are:
- Cannot be used if the company is insolvent (i.e. has debts it cannot pay) – One of the main factors to winding up a company is that it can only be done if your company is solvent. As we mentioned earlier, any attempt at winding up an insolvent company is likely to be spotted by outstanding creditors and stopped in its tracks. This is because creditors will have to put in a lot of effort, and likely spend a fair bit of money, to go through the legal process to reinstate a company once it has been wound up. If they don’t, they lose the outstanding sum, meaning they are inclined to watch out for attempts at dissolution.
- Tax inefficient – Although it is cheap to wind up a solvent company, it isn’t very tax efficient. Your income is taxed as income tax, meaning you’ll pay a high rate if your company has a large reserve of retained profits. To avoid this, it is better to use a Members’ Voluntary Liquidation, as this method entitles directors to Business Asset Disposal Relief, formerly known as Entrepreneurs’ Relief, while also allowing retained profits to be taxed under the lower Capital Gains rates.
- You are not entitled to director redundancy – If you close a company through dissolution, you are not eligible to make a director redundancy claim. Instead, you must close through a different method, as we discuss below.
Accessing director redundancy
To make yourself eligible for director redundancy, you must close through another method, namely a Creditors’ Voluntary Liquidation (CVL). This form of liquidation is intended for insolvent companies, and has a range of benefits, including allowing directors to claim director redundancy. However, you will also have to meet certain other requirements before making your application. First, your company must have traded for at least two years prior to closing. Second, you must receive your pay using the PAYE system. If you meet both of these requirements, and close using a CVL, then it is likely that your application for director redundancy will be approved.
Clarke Bell can help you
If you are considering winding up or liquidating your company, let Clarke Bell be there to help. We have more than 28 years of experience in helping companies find the most effective means to close, and we can do the same for you.
Our liquidation fees are affordable, and we will guide you through the whole process.
Contact us today for your free, no-obligation consultation and find out exactly what we can do for you.