With ever-changing markets and consumer habits, businesses that were once viable and successful may find themselves losing market share, and closing the business would be one of their options.
Why would administrators close a business?
While a downtrend in a once profitable market may cause admins to go out of business, that’s not the only reason to do so. Directors approaching retirement age might not want to pass the business on to anyone or lack a part to inherit. Selling a business is an option for directors who feel it’s time to exit their industry, although they may find it difficult if the market is down. As such, closing the business may be a better option.
Although closing a business is often linked to insolvency, the two are not mutually exclusive. Debt is often cited as a reason for business closure, but other reasons directors want to close their business may include:
- Wanting to retire without a successor party.
- A change of circumstances.
- To seek employment elsewhere.
- As part of a restructuring or merger of several companies.
If the business is insolvent, closing may be the best course of action, limiting potential damages and creditor losses.
As an administrator, you should always be aware of the solvency of your company. Signs of insolvency can include an imbalanced cash flow, the business struggling to repay debts as they come due, and legal actions such as legal demands or county court judgments (CCJ) filed against the company. If the company’s debts have reached such a level that it is unrealistic to pay them off, the directors may voluntarily close the company rather than waiting for creditors to terminate the company.
Options for creditworthy companies
When considering closing a solvent company, directors can immediately think of dissolution. Dissolving the company is a viable option if the directors wish to close a company with few assets. Before dissolving, the directors must ensure that the company:
- No legal action has been taken against him.
- Has ceased operations for at least three months.
- Can settle all employment-related obligations, including PAYE, unpaid wages, vacation pay, national insurance contributions and severance pay.
- Filed all statutory declarations with HMRC and Companies House.
- The company’s bank accounts are closed.
A dissolution is not the only way for directors of solvent companies to close. If the company has assets in excess of £25,000, the directors may consider closing the company through a solvent voluntary members’ liquidation (MVL).
Closing via solvent liquidation means the company may be eligible for Business Asset Disposal Relief (BADR), where its assets are sold, and the proceeds repay creditors and the liquidator’s fees. The remaining sums are then distributed among the shareholders of the company.
For a relatively low cost, an MVL can be more tax-efficient and faster (both in releasing funds and distributing funds) than closing by dissolution.
Options for insolvent businesses
The options are different for companies unable to repay their debts on time.
While insolvent companies can continue operations using formal repayment plans or further restructuring, the availability of these solutions depends on the company’s ability to complete them.
Directors wishing to draw a line under the insolvent company and its liabilities can do so through a voluntary creditors’ liquidation (CVL). This process draws a line under the debts of the insolvent company by closing it in an orderly fashion. All employees are terminated and all unsecured debts are forgiven. Voluntary closure can also ensure a more controlled entry into liquidation and a better return to creditors than if the company were closed via a petition for liquidation.
If a business is no longer needed due to a declining market, directors wishing to retire, or an imminent threat of insolvency, there are several options for closing it.
Directors of solvent companies with more than £25,000 in assets can close via a voluntary member liquidation (MVL), providing a faster release of funds and a more tax-efficient closure than a dissolution. Directors of insolvent companies beyond the point of reorganization can close their company by entering a creditors’ voluntary liquidation (CVL), providing a better return to creditors than if the company were forced into compulsory liquidation via a petition for liquidation.