How to advise solvent clients who are looking to close their company

How to advise solvent clients who are looking to close their company

A solvent company can be closed down using one of two methods. Members’ Voluntary Liquidation (MVL) is a formal option that must be carried out by a licensed insolvency practitioner (IP). Company dissolution is the other closure route and this is executed by the directors. 

Initially, it’s crucial to establish beyond doubt that your client’s business is indeed solvent, as if it isn’t, it can lead to serious repercussions for directors. Cash insolvency occurs when a company cannot pay its bills as they fall due. This might happen with or without balance sheet insolvency where the value of the company’s liabilities exceeds that of its assets. 

So how do you advise a solvent client wishing to close down their limited company? 

Advice on the best closure method 

Members’ Voluntary Liquidation  

MVL is an official procedure that may be appropriate if your client’s company is solvent and has £25,000 or more in retained profits. Its tax efficiency is a key element as distributions are subject to Capital Gains Tax (CGT) rather than income tax.  

By entering Members’ Voluntary Liquidation shareholders may also be eligible to claim Business Asset Disposal Relief (BADR). This reduces their tax liability to an effective rate of 10 per cent on qualifying gains, up to the current lifetime limit of £1 million.  

The benefits for your clients of taking this formal route include gaining access to the tax benefits mentioned above and knowing that all the statutory requirements associated with closing a limited company are met. 

Company dissolution 

If your clients choose company dissolution they’ll need advice on the practical side of closing the company as they carry out the process themselves. So what guidance should you give to clients looking to close down in this way? 

  • Suitability for the process: the business must not have traded, changed its name, or sold any inventory in the previous three months  
  • Administered by directors: dissolving the company includes closing down the payroll scheme, informing creditors of the intention to close, and bringing HMRC and Companies House liabilities and submissions up-to-date 
  • Cost: dissolution is an inexpensive way to close down a solvent company with less than £25,000 in distributable profits. It costs only £10, but it’s vital to ensure all creditors are informed so they can make a claim where appropriate 
  • Bona vacantia: all monies must be withdrawn from the business’s bank accounts before applying to Companies House, otherwise, the rules of bona vacantia mean that cash and other assets remaining in the company become the property of the Crown 

Guidance on the importance of establishing solvency 

If your client company is insolvent and directors begin a closure process that’s only appropriate for solvent businesses, they may face allegations of misconduct. During insolvent liquidation procedures, directors’ actions are investigated for instances of wrongdoing or negligence that may have led to financial losses for their creditors. 

If the allegations are upheld, this can lead to disqualification for up to 15 years under the Company Directors Disqualification Act, and even personal liability for company debts. The same issue might apply to voluntary dissolution as creditors with a claim against the company can have it reinstated to the register, which could also trigger an investigation by the Insolvency Service. 

Advice for solvent clients who are looking to close their company should incorporate the practical elements of how each process is carried out, but also the potential risks for directors on a personal level if they take the wrong route. With your input as a professional advisor, however, the most suitable procedure can be identified and you can help your clients to achieve their objectives. 

Author details – Shaun Barton is a partner at Company Closure and boasts a wealth of experience in helping directors of distressed companies understand their options. A director-facing adviser, Shaun is often the first point of contact for business owners in financial distress, consistently delivering expert advice when it is needed the most.