Misconceptions about closing a limited company

Rick Smith, MD of Forbes Burton, a specialist business recovery and closure company shares a few insights into closing a limited company.

Company directors may not know the full story when it comes to closing their limited company and often think that liquidation is the only way forward.

If a business has liabilities and assets, it has to be liquidated

No. Liquidation is not always possible and an arrangement with creditors can be pursued. If the director or the company can’t afford a liquidation then administrative dissolution is the only option.

In addition to this, liquidation is a lot more intrusive than dissolution and control of the company is given over to the liquidators. Dissolution allows the director to retain full control throughout the closure process, there is no formal creditors meeting and the costs are considerably less.

Dissolving a company will affect me personally

No. If the company is dissolved in the right way it will have no effect on you in the future either as a director of another company or of your own.

The debts of the company are my responsibility

No. The debts belong to the company. However, if the dissolution isn’t carried out in the right way it could leave you liable.

If I dissolve a company I can’t start another one

Wrong. You are free to start another company, even one with a similar name as long as all Companies House requirements are met.

You shouldn’t dissolve a company that has debts

If a company has debts and it is trading whilst insolvent, it could be breaking the law. It is far better to stop the company building up more debt and deal with what there is. Dissolving a company the right way addresses any outstanding debt and liabilities.

You need to use an accountant for dissolution

Accountants can administer a company closure through dissolution but they tend not to because they specialise in advising on company accounts not company closure. Most accountants outsource an administered closure, gone are the days of saying ‘leave it and Companies House will close it’, accountants know that directors can be held personally liable for the indebtedness of a company that’s been closed through a compulsory process as opposed to a voluntary administered process.

I have to meet with all my creditors before dissolving my company

Although you must inform all creditors of impending closure, dissolution does not require a formal face-to-face creditors meeting like you would expect when in liquidation. This saves time and cost when compared to traditional liquidation.

Dissolution is not a common approach

This is untrue. Dissolution is the most common method, however, because it is generally less high profile it isn’t heard about so much in popular media. Insolvency reports for July 2015 show that 25k companies were dissolved compared to 1.8k that went into liquidation.

Dissolution is only for companies that are insolvent.

This is not so. Companies need to close every day for various reasons. Common reasons include retirement, illness and change of direction for owners.

Getting an insolvency company to dissolve my company will cost a lot of money

Because dissolution is an informal process, you do not require the expense of appointing an Insolvency Practitioner. Prices are therefore much lower than a liquidation. It is however important to seek the advice of an expert in this field to ensure that your company legally qualifies for closure through dissolution, and that the process is carried out in accordance to the relevant business laws. Non-compliance carries large penalties for directors.