Shutting Down A Solvent Company

Shutting down a solvent company can be done either by a Members Voluntary Liquidation or using the strike off procedure that leads to dissolution.

Perhaps the most common way for closing down a solvent company is to use the dissolution or striking off procedure. However, this is often not the most tax-efficient way of winding up a company that has assets worth more than £25,000 with no debts.

Members Voluntary Liquidation Procedure For Shutting Down A Solvent Company

Members Voluntary Liquidation is a procedure that arises from the Insolvency Act 1986. 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.

Once the Liquidator is appointed he or she will be required to advertise for creditor claims to see if anyone comes forward. If nobody comes forward within a minimum period of 21 days then the Liquidator after paying off any remaining creditors can look to issue a distribution to the shareholders.

As well as advertising for creditors claims in Gazette insolvency notice a Liquidator will usually want to satisfy themselves of the closing down of the company’s tax affairs. HMRC no longer issues clearance to confirm that the company’s tax affairs are in order and as a result the Liquidator will usually consider the tax filings have been completed up to the point when trading ceased and any tax has been paid over to HMRC. This is part of the process of closing a trading company that is solvent. 

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.

Striking Off A Solvent Company

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, 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.

Can Insolvency Procedures Be Used For Closing Down A Solvent Company

Creditors Voluntary Liquidation and Compulsory Liquidation are procedures capable of being used to wind up a solvent company

You can also shut a solvent company by issuing a winding up petition to enable it to go into Compulsory Liquidation or seek to pass a resolution for it to be wound up by being placed into Creditors Voluntary Liquidation. 

However, both Compulsory Liquidation and Creditors Voluntary Liquidation are procedures almost exclusively reserved for shutting down an insolvent limited company, not a solvent one. It would be a far more expensive process for the closing down of a solvent company to be done using either of those procedures.