Shutting down an insolvent limited company can be done in essentially two ways; Creditors Voluntary Liquidation and Compulsory Liquidation.
Liquidation procedures are designed to address the winding up process in an orderly manner through the appointment of a Liquidator. The assets of the company are realised and if after the costs of the winding up, there is any surplus it will be distributed to the creditors. In a very unlikely event after distribution to the creditors and statutory interest, there is still a surplus, then a distribution would be made to the shareholders.
There are two other options which are usually unsuitable for simple insolvent company closures being striking off and Administration. They are however technically possible.
Creditors Voluntary Liquidation To Shut Down An Insolvent Limited Company
The most common method of shutting down an insolvent company is a procedure known as Creditors Voluntary Liquidation.
This process is set out in the Insolvency Act 1986. It enables a company through its Directors to organise a vote by the shareholders on the passing of a winding up resolution.
As it is a Creditors Voluntary Liquidation and not a Members Voluntary Liquidation which is suitable only for shutting down a solvent company, once the vote has been passed then the creditors determine the appointment of the Liquidator. This is done either via a procedure known as deemed consent or a virtual meeting of creditors.
However, before a vote can be passed by creditors there are two important procedures that need to be undertaken to provide information to creditors:
- Preparation of the Statement of Affairs and its circulation to creditors in advance of the deemed consent process or a virtual meeting of creditors.
- Providing creditors with information on the financial position of the company and reasons for the liquidation in the SIP 6 report to creditors.
Compulsory Liquidation To Close Down An Insolvent Limited Company
Compulsory Liquidation is a legal procedure that is largely used by creditors who are owed money.
When a creditor goes unpaid they have the right to issue a winding up petition for the company to be subject to a winding up order. The end result has similarities to Creditors Voluntary Liquidation but the process itself is a little different.
Upon the making of a winding up order by the Court, a government official employed by the Insolvency Service will be appointed to act as the Liquidator in the first instance. He or she may subsequently be replaced by an Insolvency Practitioner who takes over at the request of creditors.
Upon the appointment of a Liquidator, the assets of the company are realised and if after the costs of the winding up there is any surplus they can be distributed to the creditors.
Striking Off An Insolvent Limited Company
Although it is possible to shut down an insolvent company via the dissolution process using a DS01 form to strike off a company it is often unsuitable because of certain legal restrictions.
Within 7 days of filing the form DS01 at Companies House, a copy of it must be given to every:
- Shareholder
- Director
- Employee
- Creditor
- Potential creditor of the company such as anyone who has threatened or started legal proceedings.
- Pension manager or trustee.
It is commonplace for a creditor to then object which is why it is not usually suitable as a process for shutting down an insolvent company. However, if no objections are received within the two months specified in the notice then the company will usually be struck off the register within around three months from when the application was first made.
Administration
When considering how to close a limited company the Administration process is not one that someone would normally think about because its primary objective is the rescuing the company as a ongoing business.
Whilst the other two statutory objectives of the Administration procedure refer to making distributions to creditors as a method of simply winding up a company it is not a procedure readily thought of to do so. It is however technically possible.
Tax Affairs Of Insolvent Limited Company Shut Down
All of these procedures will in most cases involve closing a trading company. That means there will be tax matters to consider.
The most common creditor of an insolvent company is HM Revenue and Customs so its tax affairs feature prominently. However, unlike the process for closing down a company’s HMRC tax affairs generally, in an insolvent company HMRC is likely to issue a claim and if necessary raise assessments and determinations of tax without the need for outstanding returns to be filed.
The Liquidator will then adjudicate upon the claims of creditors if there are assets available to distribute to them.
