A company can reach the end of its useful life for many reasons. Perhaps it was incorporated for a particular purpose which has come to an end. Maybe the directors and shareholders wish to retire and there is no one to take over the business.
Sometimes the business and assets are sold, or there has been a management buyout, or family succession, leaving funds in the company for the shareholders. Perhaps there is simply no longer a commercial need for the said company.
Many owner managed businesses may benefit from considering the relevant options when planning ahead for an exit strategy and to extract funds, which we covered in a previous article. The most appropriate exit option will depend on several factors and should be considered according to your situation. Common factors include solvency of the company, intentions of shareholders for the business and the future, company structure, commercial and property agreements, IP, tax considerations, employment considerations and company assets.
Generally, there are two options for 'closing' a limited company: apply to strike the company off the register of companies or consider a members voluntary liquidation (MVL).
MVL
An MVL is a solvent liquidation. It involves a procedure by which the assets of a solvent company are realised, and the proceeds are distributed to the company's creditors and shareholders. Once the liquidation is finalised, the company is dissolved. The process must be managed by a licensed insolvency practitioner.
There may be tax benefits to the shareholders by distributing assets in an MVL, as these are typically treated as capital distributions. Business Asset Disposal Relief may be available to the shareholders. It is also possible for an MVL liquidator to distribute the company's assets 'in specie'. This means the non-cash assets can be transferred to the shareholders.
Is an MVL suitable?
- The company must cease trading.
- The company must be solvent. There is a requirement for a statutory declaration of solvency made by a majority of directors that the company will be able to pays its debts in full, together with any interest, within a specified period not exceeding 12 months from the commencement of the winding up. It is a criminal offence to make a false declaration.
- A licensed insolvency practitioner is required to assist with this process.
Procedure to commence an MVL
- A special resolution to wind up must be passed by the shareholders. The MVL is deemed to commence from the date of the passing of the resolution.
- The special resolution must be passed within five weeks of the statutory declaration of solvency.
- An ordinary resolution to appoint a liquidator.
Application to strike off a company
Alternatively, the directors of a company can apply for it to be struck off the register of companies. This is a simple application to the Registrar of Companies, and the proposed strike off is advertised in the London Gazette, and after 2 months the company is dissolved. It is important that the company carefully considers and resolves any outstanding assets prior to making the application, as once the company is dissolved, any forgotten property will vest in the Crown bona vacantia.
Is the strike off procedure suitable?
- The company must not have traded or changed its name within the 3 months prior to the strike off application being made.
- It should have disposed of all its assets prior to making the application.
- It must only have engaged in activities which are necessary for the strike off or considering this.
- The company must not be subject to any proposed insolvency proceedings.
Procedure for a strike off application
- Make application to the Registrar of Companies with the relevant fee.
- Notify creditors, employees, shareholders, and others within 7 days of sending the application to the Registrar of Companies.
- The Registrar of Companies will publish the application and 2 months later the company is dissolved.
Choosing the right option will depend on a company's circumstances. Trowers' Corporate and Restructuring teams can advise on the best option.
