Winding up your business
All good things come to an end, as they say. Businesses come to the end of their life, either because they can’t be rescued or because they are no longer needed or wanted. Whilst you are ready to put the past to bed and realise the fruits of your labour, the reality is that closing down a business is far more complicated than you might think. It may be easy to get the ball rolling when it comes to starting a business, but how do you stop it now you are done?
If you’re a sole trader, you can cease to operate once you have satisfied all of your current and future obligations and liabilities. Sole traders and their business are considered one and the same from a legal perspective and therefore the sole trader will not be protected against personal liabilities if the business suffers losses and has outstanding creditors.
The same is true for partnerships except winding down the partnership will be subject to the terms of the partnership agreement.
Winding up a company’s business is more complex as it is a separate legal entity.
The normal way to close down a company is by starting a process called “liquidation” or “winding up”. This is a legal process in which a liquidator is appointed to wind up the affairs of a company and at the end of the process the company ceases to exist. This process does not necessarily mean that all the creditors (those to whom the company owes money) will get paid.
There are three different types of liquidation:
- Members’ Voluntary Liquidation
- Creditors’ Voluntary Liquidation
- Compulsory Liquidation
You may choose to liquidate your company because you cannot find a buyer or because you want to realise the value of your company in cash. Or, your decision to liquidate may be because the company is insolvent - unable to pay its debts as they fall due.
An insolvent company should cease trading immediately, failing which the directors are at risk of becoming liable for the company’s debts. If you suspect that your company is insolvent you must take professional advice – it may be possible to negotiate with the creditors a payment plan for the payment of outstanding debts and avoid liquidation.
If your company is in difficulties but there is some hope of recovery, it may be put into the hands of an insolvency practitioner acting as an Administrator who can be appointed in or out of court by:
- a company or its directors
- a creditor
- the holder of a qualifying floating charge over the company’s assets
Once an Administrator is appointed, the company is protected from action being taken by creditors and cannot be wound up without the court’s permission. The Administrator’s first priority is to stabilise the company’s financial position. Once this is achieved, the Administrator will develop an action plan for its future.
The Administrator may be able to save the business, but if they cannot, they will seek to maximise the capital to be distributed to the creditors and will eventually liquidate the company.
This is a simpler and cheaper method and is ideal for closing down companies which have no debts.
There are various steps that must be taken to ensure a company is disolved properly. These will include ceasing to trade, repaying all company debts in full, paying any outstanding corporation tax, in the case of companies registered for VAT, applying to HM Revenue & Customs to have the VAT registration cancelled, properly dealing with any employees and preparing a final set of accounts. This list is not exhaustive and advice should be sought to ensure this process is dealt with in the proper manner.
Three months after trading has stopped, the directors can apply to Companies House to strike the company off the Companies Register.
Unless one of the few exemptions applies, there are restrictions preventing a former director of a liquidated company from using what is known as a ‘prohibited name' for five years after liquidation. This includes not only the registered name but also any trading name of the former company or a name so similar that it may suggest a link with it. The restriction applies not only to the set up of a new company with a similar name but the set up of any business (i.e. working as a sole trader or in partnership).
Warning – using a prohibited name outside of recognised exceptions could result in you being found personally liable for the debts of the former company. You should therefore seek advice as to the proper course of action to follow prior to setting up a new company.
It is best to take legal advice at an early stage to give you the best chances of saving your business, or to maximise your returns on its winding up.
If you would like to talk to someone about your business and what chapter of the story you're at, please contact Helen Mead, Partner, Head of Corporate Finance.