When a company ceases trading then the question of how to close a dormant company may need to be considered by the Directors if they wish to remove the administrative costs of a live company.
However, before that is considered you need to ask the question if the company is solvent or insolvent.
If the dormant company is solvent then it can be closed down using either the Members Voluntary Liquidation procedure or Strike Off process to bring about dissolution. Alternatively, if the company is insolvent then generally the process to close it would be either a Creditors Voluntary Liquidation or a Compulsory Liquidation.
What Is A Dormant Company?
A dormant company is a company that is not trading but which still exists. It is registered at Companies House.
Given it exists, it has compliance obligations that remain such as filing accounts, corporation tax returns and confirmation statements each year. There are costs associated with such compliance and if the company is not trading then it will not be making profits. Such costs can therefore act as a drain on its assets and the Directors may wish to eliminate them by closing the dormant company down and distributing its assets to the shareholders.
Closing A Solvent Dormant Company
The method to close a dormant company will depend usually on the tax efficiencies and costs associated with the procedures.
Closing A Dormant Company Using Members Voluntary Liquidation
Members Voluntary Liquidation is a procedure that arises from the Insolvency Act 1986 for shutting down a solvent company.
The process seeks to pass a winding up resolution of the company for it to be wound up which requires 75% or more of the shareholders with voting rights to approve it.
Before passing the winding up resolution for Members Voluntary Liquidation the Directors will need to swear a statutory declaration of solvency in which a statement of affairs demonstrates that the company’s assets exceed its liabilities.
A solvent company can then appoint a Liquidator to be responsible for acting instead of the Directors to wind it up.
A Liquidator will usually want to satisfy themselves the closing down of the company’s tax affairs has been done properly and check recent returns have been filed and tax paid over to HMRC.
The distribution of any assets by a Liquidator to shareholders is usually treated as capital and not income, which is then subject to capital gains tax as opposed to income tax. This can result in the tax rate being 20% and it can even drop to as low as 10% in the event that the shareholder qualifies for Business Asset Disposal Relief (formerly known as Entrepreneurs Relief).
These tax advantages from using the Members Voluntary Liquidation procedure as opposed to striking the company off may make it an attractive option for closing down a solvent company instead of using the voluntary strike off procedure to dissolve it.
Closing A Dormant Company Using Company Dissolution
For many companies, the costs of having to employ the services of a Liquidator and using the Members Voluntary Liquidation procedure when considered against the extra tax costs may make dissolution or striking off the company cheaper.
There are however restrictions on the deployment of the strike off process:
- the company may not make an application for voluntary strike off if, at any time in the last 3 months, it has:
- traded or otherwise carried on business
- changed its name
- engaged in any other activity except one which is necessary for the purpose of:
- making an application for strike off or deciding whether to do so (for example, seeking professional advice on the application or paying the filing fee for the strike off application)
- concluding the affairs of the company, such as settling trading or business debts
- complying with any statutory requirement
- made a disposal for value of property or rights that, immediately before ceasing to trade or otherwise carry on business, it held for the purpose of disposal for gain in the normal course of trading or otherwise carrying on business
A company cannot apply to be struck off if it is the subject, or proposed subject, of:
- any insolvency proceedings such as liquidation, including where a petition has been presented but has not yet been dealt with
- a section 895 scheme (that is a compromise or arrangement between a company and its creditors or members)
When considering how to close a limited company generally compared with having to pay a Liquidator, using DS01 form to strike off a company can be done for as little as £8. As a result, for a company that is solvent with a small amount of assets, shutting it down by having it struck off can be a quick and cheap procedure.
Closing An Insolvent Dormant Company
As with a solvent dormant company closure there are essentially two processes, being Creditors Voluntary Liquidation or Compulsory Liquidation. The most common method chosen is Creditors Voluntary Liquidation because Directors are seen as responsible in being proactive in dealing with an insolvent company’s affairs rather than leaving it to creditors to potentially lose money in winding it up.
Closing A Dormant Company Using Creditors Voluntary Liquidation
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 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.
Closing A Dormant Company Using Compulsory Liquidation
Compulsory Liquidation is a legal procedure that is usually used by creditors who are owed money. However, it can also be deployed by a company under Section 122 of the Insolvency Act 1986 if it has passed a resolution for winding up.
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.
