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Closing a limited company: understanding your options

There are a number of ways to close a limited company in Scotland and it is vital you choose the most suitable option for your company when the time comes to bring the business to an end. When it comes to identifying the most appropriate option, much of this will depend on the financial position of the company at the proposed time of closure.

If the company is solvent (whereby it owns more than it owes), the options available will be different to those open to a company which has found itself in an insolvent (where its debts exceed its assets) position. Once you have determined whether the company in question is solvent or insolvent, you can better understand your options.

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Closing a solvent limited company

There are two main ways of closing a solvent limited company; this can be achieved either by liquidation or by the strike off process. While each process brings a limited company to an end, the way in which this is done differs.

  • Members’ Voluntary Liquidation (MVL) – A Members’ Voluntary Liquidation – also known as an MVL – is a formal insolvency process which sees a limited company brought to an end . While it is technically classed as an insolvency process, an MVL is in fact only suitable for solvent companies who have funds to distribute to shareholders/directors. Directors will be required to sign a declaration of solvency, attesting to the solvent position at the time of planned closure. Due to being a formal insolvency process, an MVL can only be entered into under the guidance of a licensed insolvency practitioner; this will come with associated professional fees which will be charged by the insolvency practitioner to undertake the liquidation. Despite this, an MVL can be the most cost-effective way of extracting funds when closing a limited company due to the tax treatment which is given via this process.
  • Strike Off (Dissolution) – Unlike an MVL, striking off a company is an informal process which can be undertaken by the directors of the solvent company without requiring the input of an insolvency practitioner; this makes the strike off process much cheaper and much quicker than opting for the liquidation route via an MVL. However, while strike off is a suitable option for some limited companies – particularly those which have never traded or have little in the form of assets to distribute to shareholders – directors should not be tempted to take this option until they have assessed whether an MVL could allow them to extract the proceeds of the business in a more cost-effective manner. If strike off is determined as being the most suitable way in closing down the business, a DS01 form should be filed with Companies House and all interested parties must be furnished with a copy of this within 7 days.

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Closing an insolvent limited company

Just like when it comes to closing a solvent limited company, there are a number of ways in which an insolvent company can be closed. An insolvent company is one which has liabilities greater than the value of its assets, and/or where the company is unable to service its debts and other running costs as and when they fall due. Due to this, the closure of an insolvent company may be initiated by its creditors as well as by the

  • Creditors’ Voluntary Liquidation (CVL) – A Creditors’ Voluntary Liquidation is a formal process entered into voluntarily by the directors of an insolvent limited company. A CVL works in a similar manner to an MVL, with the crucial difference that the company is insolvent and therefore any assets or funds in the company will be distributed to its outstanding creditors rather than its shareholders. An insolvency practitioner of the directors choice will be appointed to handle the liquidation and liaise with creditors on behalf of the company. Any company debt which remains outstanding following the liquidation of company assets and subsequent distribution to creditors, will be written off as part of the CVL process unless this borrowing has been secured with a personal guarantee.
  • Compulsory Liquidation – Unlike a CVL, compulsory liquidation is something which is forced upon an insolvent limited company, typically by disgruntled creditors who have exhausted all other options of recovering money owed to them by the company in question. Following a Winding Up Petition (WUP) being issued against the insolvent company, an Official Receiver will be appointed to act as liquidator and the liquidation will largely follow the same process as a CVL. The difference, however, is that with a CVL, directors have more control over the timing of the liquidation as well as who is appointed to be the liquidator of the company. It should also be noted that being forced into compulsory liquidation does not tend to reflect as favourably on the directors of the company as it would if they had taken the steps to voluntarily prioritise the interests of creditors by placing the company into CVL.

Take our 60 Second Test to understand your options

There are three main ways to close a company in Scotland. Taking our 60 Second Test will help our advisers identify the correct route forward for you and your company.

While all three closure options have their advantages and disadvantages, the right one for you will depend on a number of factors including the current financial position of the company and your plans for the future.

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I knew I needed to close my company but I wasn’t sure how to go about this with large debts that I was unable to repay. Scotland Liquidators clearly explained my options and held my hand throughout the entire process.

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Contact the Scotland Liquidators Team

There are several options when it comes to closing a limited company and it is vitally important you choose the one which is right for you, your company, and your creditors. Whether you are struggling with rising costs, falling trade, or impatient creditors, we are here to help.

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