A limited company may need to be closed down for a variety of reasons e.g. the company may have met its purpose and is now no longer needed; it may have ceased to be part of the group's core business; the core business may have been sold on and only the shell legal entity remains; or the company may have suffered a downturn and become insolvent and the operations need to be brought to an end.
There are two recognised routes for eliminating limited companies in England and Wales, namely striking off and liquidation (solvent and insolvent).
Striking Off
The directors of the company can make an application to the Registrar of Companies for the removal of the company from the Company Register. Application is made by way of form 652a and a small filing fee is required. The directors must distribute a copy of the application to every "notifiable person", which includes the members, employees, creditors, directors and trustees of any company pension fund. Application may not be made if the company has within the previous three months changed its name, traded or otherwise carried on business, sold property or rights or engaged in any other business activity.
Directors must withdraw an application if a company ceases to be eligible for striking-off. Furthermore public limited companies (PLCs) cannot apply for striking off. There are penalty provisions if false applications are made.
The major drawback of the striking off route is that the company can be restored back to the Company Register on application within twenty years and the liability of directors, members and managing officers continues and may be enforced as if the company had not been dissolved.
Assets remaining in companies that are dissolved become payable to the Crown. Only a liquidator can make a capital distribution back to the members. Unless there is a capital reduction prior to dissolution, companies that have a positive balance sheet will be unable to release the asset value back to the shareholders without a solvent liquidation procedure.
Solvent Liquidation
Companies that are able to discharge all their liabilities within a twelve month period can be liquidated by way of a members voluntary liquidation. This requires the directors to make and deliver to the Registrar of Companies a declaration of solvency which includes a statement of the company's assets and liabilities.
The company is placed into liquidation by the members either by passing a written resolution or by passing a shareholders' resolution at an Extraordinary General Meeting convened for that purpose. In a members' voluntary winding up, the creditors of the company play no part, as the assumption is that all debts will be paid in full. Should, however, the liquidator conclude at a later date that the company will be unable to pay its debts either within the twelve month period or in full, he must convene a meeting of the creditors and proceed with the liquidation as a creditors' voluntary liquidation.
It is a criminal offence for a director to make a declaration of solvency without having reasonable grounds for making it.
Insolvent Liquidation
The directors of a company should seek professional advice as soon as they become aware that the company cannot continue it's operations profitably or is unable to pay it's liabilities in full as they fall due. This is because under an insolvent liquidation the Liquidator has powers to bring proceedings against the directors personally for a contribution to the company assets where wrongful or fraudulent trading has taken place. Such a situation may arise where a letter of support given by a parent company is withdrawn. Furthermore the Liquidator has the power to set aside certain transactions at an undervalue, and preference payments to associated parties.
It is imperative that directors take advice to protect their personal position, as payments made in the normal course of business may, in these circumstances, become a personal liability of the directors.
The company is placed into liquidation by a shareholders resolution passed at an Extraordinary General Meeting convened for that purpose and a meeting of the company's creditors must be held within 14 days to receive information about the company, the reasons for failure and to approve the appointment of the company liquidator. The directors must prepare a statement of the company's affairs detailing the assets and liabilities and a director must act as Chairman of the meeting of creditors. Normally the two meetings are held the same day.
Under both solvent and insolvent liquidation procedures, the directors powers end on the appointment of the liquidator, but they are not automatically terminated from office. The liquidator is responsible for realising the company's assets to discharge the creditors and where there is a surplus return any remaining assets to the members.
Under an insolvent liquidation the Liquidator has a statutory duty to make a report on the conduct of all directors and who held office in the three years prior to liquidation. Where there are no reportable issues this comprises a return of a list of names and addresses only.
Unpaid creditors can petition the Court for a formal winding up of the company and the liquidation procedure that follows is similar to an insolvent liquidation process, except that proceedings are conducted by a government body.
© Grant Thornton, August 2003
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