Directors usually want their company to succeed, and even when times are hard, closing is often one of the last options they’d want to resort to. That said, there are circumstances where closing a company is for the best, despite how contradictory that might sound. In those situations, closing the company could even reduce the longer-lasting harm than if it were to stay open, limiting potential damage to the director(s) personal life.
So, in what circumstances would directors be better off closing their company?
Creditors are demanding their money back
If a company is insolvent, there will be several warning signs that directors should look out for. One of the most telling of these warning signs is mounting creditor pressure, which often goes hand in hand with an imbalanced cash flow.
While reading reminder letters or listening to phone calls from creditors or debt collectors is unpleasant, you should NEVER ignore them. If your company’s debts aren’t repaid as and when they fall due, creditors may bring statutory demands or even County Court Judgements (CCJs) against the company to reclaim the money they’re owed.
If unchallenged, these charges remain on your company’s credit file for six years, making it harder to obtain credit. Ignoring CCJs may even result in visits from High Court Enforcement Officers, and in the worst instance, creditors may even petition to wind up the company for debts greater than £750. They can do this through a winding-up petition.
Once published in the relevant Gazette, this freezes the company’s bank accounts and stops all trading.
More money is going out than is coming in
The company may be insolvent if it lacks the funds or assets necessary to pay its debts on time. Companies can experience downturn due to any number of circumstances, but when that company is losing money faster than it is making it, there may be more serious issues that can lead to the company’s downfall if not addressed.
As soon as you learn your company cannot repay what it owes, you should contact a licensed insolvency practitioner. They will consider your company’s circumstances and help you choose the best solution. With the right advice early enough, you might be able to keep the company operating while repaying what it can. (If this is feasible – it will depend on the method that the insolvency practitioner determines best for the company).
There’s no realistic future for the company
In addition to being unable to repay what it owes, the company’s business plan and model may no longer be sustainable. This unsustainability may be the result of financial constraints, but it may also relate to a changing economy or the director’s personal life.
The board of directors might want to retire without a successor or decide against selling the company. The company’s target market or audience could no longer exist or may have undergone changes that are impossible for the business to adapt to.
Closing your company
Speak to a licenced insolvency practitioner (IP) before you decide you want to liquidate the company. They can outline your company’s options as not all arrangements will be suitable. Even if the company is insolvent, there might be other ways to resolve the issue.
Repaying the debt in instalments could be an option, along with restructuring the company and returning it to a profitable state. However, if the company’s insolvency is such a burden that recovery is unlikely, then closing it through a Creditors Voluntary Liquidation (CVL) may be the best option.
Although liquidation is mostly associated with companies that can’t afford to repay their debts, solvent companies can also enter liquidation. In their case, this would be a solvent Members Voluntary Liquidation (MVL), which allows directors to take advantage of Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) and can help to avoid paying tax than striking the company off the register at Companies House and works best if the company has more than £25k.
Conclusion
Though it might seem like the last thing a company’s directors would want, depending on the situation, closing the private company may be the best option. Directors might consider closure if the company’s cash flow is unbalanced, its liabilities exceed the assets, creditors are pursuing legal action, and the company’s future looks bleak.
Insolvency doesn’t have to be the only deciding factor in whether to close the company. Closing the company through a voluntary liquidation is often better than allowing the creditors to wind it up through compulsory liquidation.