When & How to Dissolve a Company

There are many reasons why a company could be dissolved. There may be a dispute between the shareholders and directors, there may be succession issues following the death of the business owner, or the business may simply have run its course or perhaps never achieved the desired success.

Whatever the reason, the process to close or dissolve a company can quickly become complicated, depending on the company circumstances.

This guide helps business owners understand the process for dissolving a limited company in the UK and explains the different legal routes to close a company.

 

What does dissolving a company mean?

 

Limited company dissolution is the closing down of a company so that it is no longer a legal entity, and it ceases to exist. Strike-off is when a company is wound up and struck off the public register at Companies House. Strike-off is the easiest way to close a company down, but which option should be taken depends on whether the company is solvent or insolvent. The dissolution process can also be voluntary or involuntary.

 

Why dissolve a company?

 

A voluntary dissolution, where the directors and shareholders decide to dissolve their company, can arise for numerous reasons. These include where:

 

• The business is no longer viable
• The business never traded and has remained dormant
• The owner passes away or wishes to retire
• The owner no longer wants to run a company
• The company was only incorporated to protect a company name which is no longer needed
• The owner wishes to re-register the company in a different jurisdiction
• The directors wish to avoid paying late filing penalties at Companies House; these penalties are usually waived on dissolution

 

Reasons for involuntary dissolution

 

Involuntary dissolution is where the decision to dissolve is taken out of the directors’ hands. A company is forcibly dissolved by Companies House if it believes the company is no longer in business. It might take this view if the company has failed to keep up with its filing requirements at Companies House or if the company does not have any directors, or if mail is being returned unopened. Companies House will not resort to this option lightly and will take all measures to determine whether the company is still operating before dissolving it.

 

Before dissolving a company

 

Before commencing the dissolution process, there are certain steps a company needs to carry out to ensure the business is closed down legally.

 

• All company accounts need to be dealt with as at the date of dissolution they will be frozen. Therefore, bank accounts should be closed down and the ownership of company assets should be transferred out of the company name. If this is not done, all assets will pass to the Crown on dissolution and the company will need to be restored to get them back.
• Inform HMRC and all other interested parties that the company is to be dissolved.
• Ensure the company employees are dealt with correctly under UK employment law and that their wages are settled including any redundancy payments.
• Clear any debts owing to creditors and HMRC – HMRC can still pursue debts after dissolution.
• Ensure all company accounts and the final tax return are completed and up to date.
• Deregister for VAT and PAYE if applicable.

 

Legal process to dissolve a company in the UK

 

Voluntary company dissolution – striking off a solvent company

 

There are certain criteria under sections 1004 and 1005 of the Companies Act 2006, that must be met for a company to be successfully wound up through a voluntary company dissolution.

 

• The company must not have changed its name or been active in the last three months. This means it should not have traded or sold any stock.
• The company should not have engaged in any activity apart from that necessary for dealing with the application for dissolution and winding up the affairs of the company and complying with any statutory requirements in this regard.
• The company must not be the subject of any insolvency proceedings or have any agreements in place with creditors.

 

The directors, or a majority of them, must approve a dissolution by passing a resolution to this effect. This is done by voting in person at a meeting or by written resolution. The company Articles of Association and shareholders’ agreement should also be checked, as they may contain specific provisions about the striking off process.

Once a majority has approved the dissolution, the formal application should be made to Companies House on form DS01. This form should contain the company name and registration number, name and signatures of the directors or majority if more than two, the date of these signatures and the name and contact details of the person filing the application. An application can be done online or by post.
Once Companies House has received and approved the application, they will register the information of the proposed dissolution and publish it on the public register of companies and send an acknowledgment of this to the contact person on the form, as well as to the registered office address of the company. They will then publish notice of the dissolution in The Gazette to allow for any objections to be made by interested parties.

The Gazette is the UK official journal of record. There are three publications for the different UK jurisdictions. Any strike off or dissolution notice published in The Gazette will be published in the relevant jurisdiction applicable to the company. The London Gazette applies to all companies registered in England and Wales.

If no objection is made by any third party, the company will be struck off the register by Companies House not less than two months, and usually no more than three months, after the date of the notice. The company will be dissolved, and a further notice will be published in The Gazette confirming the company has been struck off.

It is worth noting that Companies House keep a dissolved company’s information on the public register for a period of 20 years after the dissolution.

A company should send a copy of the application for strike off to any interested parties who may be affected by the company’s closure within seven days of the application being filed. Such interested parties include directors who did not sign the application, shareholders or guarantors, creditors, employees, and managers or trustees of any employee pension funds. A copy should also be sent to anyone who becomes a director, employee, creditor, or trustee at any point after the application has been filed, within seven days of their becoming so.

As a result of the two-month minimum period allowing for objections to be raised to an application, the whole dissolution process typically takes between two and three months. This is the cheapest option for closing a company and simply requires a £10 disbursement fee when filing the striking-off application, or £8 if filing online. That said, what is often overlooked is the fact that a director cannot claim director redundancy on dissolution.

 

Members’ voluntary liquidation of a solvent company

 

This option is slightly more complex than a strike off but equally applies to a solvent company, or a company which is able to settle its debts within 12 months. The process begins with the company making a Declaration of Solvency. Within five weeks, the company should propose a special resolution to voluntarily liquidate the company, which requires the approval of a 75% majority of the directors. When this has been passed, notice should be published in The Gazette within 14 days. A liquidator must be appointed as part of the liquidation process making this option more costly than dissolution. The liquidator completes and submits form LQ01 to Companies House within two weeks of being appointed. When all outstanding debts have been paid, the remaining funds will be distributed amongst the shareholders. After the process is complete, the liquidator should call a general meeting of the members and creditors to notify them of the liquidation and present them with a full report. Notice of this meeting should be advertised in The Gazette a month beforehand.

The progress report should be sent to Companies House within a week of the meeting with a Return of Final Meeting. The company will be dissolved within three months of filing the report and return. Although the company will be liable for the liquidator’s fee, this is often the most tax-efficient way of closing down a company as Business Asset Disposal Relief can be claimed to reduce any Capital Gains Tax liability.

 

Creditors’ voluntary liquidation of an insolvent company

 

This is the process required if a company is insolvent and unable to pay its bills. To initiate it, a director must call a shareholders’ general meeting, in which a special resolution must be passed to approve a winding up of the company; this should be sent to Companies House within 15 days of the meeting and advertised in The Gazette. A liquidator must then be appointed to oversee the liquidation. A creditors’ meeting should be held within 14 days of the resolution being passed, at which a Statement of Affairs should be presented to the creditors and a copy sent to the liquidator afterwards. The process is complete when all company assets have been sold and distributed to the creditors in order of priority. The company will be struck off the register within three months of the liquidator’s final meeting. This is often the most expensive option to close down a company.

 

Compulsory liquidation by creditors or HMRC

 

This process will apply to companies which are insolvent, and which cannot come to an agreement with its creditors. The company can make an application to court for a winding-up petition to close the company. The appointed liquidator will put the company into liquidation and any assets will be sold. As this process is forced by a company’s creditors or by HMRC, the cost will be borne by the creditor.

 

Register the company as dormant

 

If the company directors believe they may have further future use for the company, declaring it dormant rather than dissolving it is a far easier and more cost-effective option, effectively keeping it on the backburner, just in case it needs to be revived. Nevertheless, a company still needs to file a set of accounts and a statement of conformity annually.

 

What happens after a company has been dissolved?

 

A company that has been dissolved can no longer legally operate as a trading concern. If it does so, there are serious legal consequences for the company directors if it tries to continue trading after being struck off the Companies House register. An application for dissolution must be withdrawn (using form DS02), if a company is no longer eligible to be struck off, either because it becomes insolvent or it begins trading again, or if the directors simply change their mind.

A company can, however, be restored to the register, with the same name, as long as the name is not being used by another company since the dissolution. A court order must be applied for. If the company was involuntarily dissolved by Companies House as a result of failing to file the necessary paperwork, a company can apply to the Companies House registrar to have it restored. Creditors can also seek to have a company restored to the register if it has been dissolved without paying its debts, allowing the creditors to claim what is owed to them.