A company dissolution is the most straightforward way of winding up a business and the one that the owner has the most control over. However, it is only for companies that have no debts or that are able to pay them. The alternative for insolvent companies is liquidation, which is covered in another article.
The dissolution process takes a few months from stopping trading and there are a number of things you must and must not do otherwise Companies House will reject the application. This timescale gives plenty of time for second thoughts or for external factors to come into play that might reverse the owner’s decision to sell.
Some owners who want to step away from day-to-day management but not close the company, which may cause job losses and the disappearance of a business that is valued by its customers, might consider a middle way of selling part of the company. They can then continue to draw an income from it and exert some control over it. Much depends on whether they sell a minority or majority share and exactly what percentage of the total shares they are left with. This topic is covered at the end of the article.
Dissolution
This is the simplest and cheapest way of closing down a company. The end result is that the company ceases to exist and is struck off the Companies House register. It is a relatively lengthy process, comparable in duration to buying a house,although none of the steps in themselves are complicated.
Many advisers counsel in favour of a slow and steady approach to a dissolution. This will allow time for creditors to appear out of the woodwork and any employees to adjust to the idea of their redundancy, and for you to work through any second thoughts. Taking your time will also give you more control of the process, and allow for the unexpected, say, a major new client appearing that could make you rethink the idea of closing the company.
In addition it is essential to sell all assets as you will lose the value of any unsold ones once the company is struck off. As you don’t want to be running a fire sale allowing extra time will give more opportunity to achieve a good price for them.
What are the steps to dissolving a company?
First of all the company must settle any outstanding debts. If it has debts it can’t pay it will have to be closed via a liquidation. However, being debt-free is not the only criterion. The company must also not have:
- Traded in the past three months.
- Changed its name in the past three months.
- Any legal proceedings active against it.
- A repayment arrangement in place for debts, such as a company voluntary arrangement.
If you can tick all these boxes then dissolution is for you. However, before you send the application to dissolve or strike off to Companies House (available from Gov.uk), there are some other steps you have to complete.
Directors
Your co-directors (if any) must be informed of and agree to the dissolution.
Other parties
Your employees, directors, customers, suppliers, shareholders and any creditors need to be informed of the impending closure.
Liquidate the company’s assets
You must either sell or transfer to someone else whatever belongs to the company. Anything you don’t get rid off will pass to the Crown once the strike-off is complete. This includes HMRC refunds. However, if you realise a refund or any other credit is due after strike-off it is possible to restore the company to get it paid to you.
Employees
Make sure everyone is paid up to date and any rules and laws governing redundancy are followed correctly.
HMRC
You must file your last set of accounts, stating that it is the final set as you are dissolving the company. You also need to submit and pay your last tax return. If relevant you should de-register for VAT and close your company’s payroll scheme.
Contracts and banking
Lastly, any contracts formed by the company must be ended, e.g. with a broadband supplier or utility company, and you must close the company’s bank account.
Trying to dissolve a company that has debts
HMRC and creditors can lodge objections to an attempt to dissolve a company if they are owed money and can apply to the courts to restore a company to the register. This means dishonest attempts to dissolve a company to avoid paying debts are likely to fail. In HMRC’s case, it can add interest and penalties backdated to the date of the striking off.
In addition, owners could end up facing a compulsory liquidation, which they will have little control of. They are also likely to face accusations of misconduct since, as directors, they would have been aware of the company’s financial position.
The application
Once all these steps are complete you can apply for the strike-off, usually online although a paper form is available. Anyone with an interest in the company must be told about the application within seven days of the application. This includes employees, shareholders, directors and creditors.
Dissolution
A notice of the intention to dissolve will appear in the Gazette – the official public record published by Companies House giving details of all UK companies registered with it. If there are any outstanding creditors this gives them a chance to object. If no objections are made to the dissolution, the company will be dissolved two months later and a notice will be published in the Gazette confirming the strike-off.
Alternatives to dissolution
The owner of a solvent business has a few options if he or she wants to give up running it, which include selling a chunk of it or allowing it to go dormant.
A part-sale
Owners of businesses that are going concerns will sometimes consider selling a stake in them, especially if the reasons for considering a dissolution are personal rather than being imposed on the company by external factors.
The main question is whether they want to retain majority or minority ownership. Selling a minority share will generally be to access more capital or expertise so will not generally reduce the owner’s workload much. Selling a majority shareholding will achieve that but at the cost of losing legal control of the company.
As a minority owner the former outright owner will receive an income, usually as dividends, and should have the right to see financial information, such as the annual report and directors’ report as well as management reports. Minority owners will also be able to vote on decisions and resolutions at general meetings, although voting rights vary depending on the type of shares they own and what proportion of the total they amount to, and what was agreed.
Shareholders acquire more rights at a series of thresholds from 5% to 90%. The two crucial thresholds are 50%, which allows the former outright owner to block resolutions, and more than 50% that allows the majority shareholder to pass resolutions regardless of the wishes of other shareholders.
It is vital for a prospective minority shareholder to obtain legal advice to make sure the company’s amended articles and shareholders’ agreement give him or her the rights and powers that have been agreed upon. There are many cases of minority shareholders being shut out of decision-making or being denied access to financial records. In some cases, legal proceedings can be necessary to force disclosure. They have the legal right to not be treated unfairly or with prejudice.
Going dormant
If for whatever reason you want to take a break from running the business you can declare it dormant. You can only do this if:
- The company is not carrying out any business activity.
- It is not trading.
- It is not receiving income.
Its registration at Companies House remains live and there is no time limit to how long it can remain dormant. You must continue to send your annual accounts and confirmation statement (formerly annual return) to Companies House.
Liquidation
As stated at the top of the article, this is covered in a separate piece. Company owners will have to go down this route if they are unable to pay debts and become insolvent. They have far less control of the process than they do with a dissolution.
Deciding on the best route
Business owners who want advice about dissolving or liquidating a business and which is best for them should get in touch with the friendly team at Finsbury Robinson. They will be able to deal with all your questions and help you move forward with your plans. Please call us on 0208 858 4303 or email us at info@finsburyrobinson.co.uk
