How Do You Close a Company in Scotland?May 31, 2019
Some time in 578 AD, Prince Shōtoku invited Korean craftsmen to Japan to help build a new Buddhist temple. One of the craftsmen decided to start his own construction business in Japan, which he called Kongō Gumi. Over 1,400 years later, Kongō Gumi clinched the record for the world’s oldest continually operating company.
In the centuries that followed Kongō Gumi’s incorporation, the company contributed many famous buildings to Japan’s skyline, including the 16th-century Osaka Castle and many intricate temple complexes.
However, all good things must come to an end. In the 1990s, the Japanese property market crashed, leaving Kongō Gumi reeling. Its position got worse over the next 10 years as its leadership struggled to cope with modern collaborative projects, shorter timeframes and contemporary design trends. In 2006, Kongō Gumi entered liquidation, bringing an end to the 1,427-year-old company.
Few companies will get anywhere near Kongō Gumi’s record before they close. Indeed, some of our best-loved businesses lasted just a handful of years before they shut up shop. Maplin survived just 42 years, Blockbuster lasted just 24 and Borders managed just 13. And smaller businesses typically close much sooner than national chains, although their closure is typically due to a myriad of different reasons. For example, small business owners may wish to retire, partners may fall out, the business may not perform as expected or economic conditions might make continued operation untenable.
Whatever the reason, business owners always need to think about how they will close their companies. If closed incorrectly, directors can negate the protection of limited status and attract personal liability for company debts. In this article, we’ll look at five different ways directors can close their companies.
The first option we’re looking at is having your company struck off from the Companies House register. While striking off at first glance seems the straightforward option, it’s not available to all companies nor is it necessarily the best option. The HMRC can, and often do lodge an objection at the Companies House which then prevents the striking off going ahead.
If you’re confident that striking off is an option, you must follow a strict process to actually dissolve your company. The process is quite long and complicated so we won’t get into specifics here. If you want to dig a little deeper, we recommend reading through the Government’s guide Strike off your limited company from the Companies Register.
While many casual commentators often recommend striking off as a low-cost company closure method, it’s not a simple process. As we alluded to in the introduction, if you don’t follow the process perfectly, you can open yourself up to personal liability down the line. For all company closures, we strongly recommend you seek advice from a reputable insolvency practitioner or business closure specialist before trying to close your company yourself.
Members' voluntary liquidation (solvent companies)
The second option we’re looking at is closure via a members' voluntary liquidation or MVL. This type of liquidation is only available to solvent companies and directors must sign a Declaration of Solvency before the liquidation actually takes place.
MVLs are commonly used by business owners who wish to retire or move on from their current business. The main reason solvent business owners opt for this type of closure is tax efficiency.
If you close a company via an MVL, HMRC treats all the extracted money as capital distribution, rather than the alternative of paying out as a salary (then incurring Income and National Insurance Tax) or as dividends (after incurring 19% Corporation Tax and then Income Tax at possibly 38%). When treating the funds as capital distribution, this is usually taxed at 20% which is a much lower tax rate than both salary & dividends.
If you're a smaller business, you might even qualify for entrepreneurs relief which, on the contrary, produces a very attractive tax rate of only 10% giving you even further substantial tax savings.
So how do you qualify for entrepreneurs relief?
To qualify for entrepreneuers relief when selling all or part of your business you must:
- Be a sole trader or business partner
- Have owned the business for at least 2 years before the date you sell it
The tax relief applies to capital gains (usually taxed at 20%) on disposal of certain assets such as shares, a sole trade business, or personal assets used by the business.
If you need to sport and navigate all the pitfalls of entrepreneurs relief, we advise you to get in touch with a specialised accountant or tax advisor.
During an MVL, the company’s shareholders appoint a liquidator (who must be an insolvency practitioner) to manage the liquidation process. The liquidator will then liquidate the assets, pay all remaining creditors, prepare final tax returns, obtain clearance from HMRC, distribute funds to shareholders and dissolve the company.
Members' Voluntary Liquidation Case Study
On 5th April 2005, John Harvey, Laura Holt, David Shepherd, Marietta Marinova, John Darby and Paul Drew founded Vale Growers, a cooperative buying group for farms near Evesham.
For several years, the company operated profitably, helping local farmers pool their purchasing power and leverage better deals. But over time, the cooperative members drifted away and the company ceased trading in 2012. However, the company still had significant funds built up and the directors wanted to extract the money in the most tax-efficient means possible.
The directors appointed a local insolvency practitioner to put the company into Members' Voluntary Liquidation. As we discussed earlier, this allowed the directors to extract funds as capital distribution and minimise their tax liabilities.
Creditors' voluntary liquidation (insolvent companies)
A creditors’ voluntary liquidation or CVL is the first type of liquidation available to insolvent companies. (A company is insolvent when it can’t pay its debts when they fall due.) CVLs are often requested by the directors of a company but they must be initiated by the company’s shareholders and creditors. If the shareholders and creditors do not agree to a CVL, the liquidation can’t proceed.
The voluntary liquidation is an agreement between shareholding directors, other shareholders and creditors to put the company into liquidation without any need to get the court involved.
In this type of liquidation, the creditors have the final say on who is appointed liquidator to oversee the process. Normally the business owners get to nominate who they want as liquidator and the creditors simply agree. Once the liquidator has been appointed, CVLs follow the same process as MVLs. The liquidator liquidates the assets, distributes the funds in accordance with the law, prepares final tax returns, obtains clearance from HMRC and dissolves the company.
Creditors' Voluntary Liquidation Case Study
On 10th May 2019, Brighton-based chocolatier Choccywoccydoodah ceased trading, closing its doors for the first time in eighteen years. Five days later, Choccywoccydoodah’s directors appointed a local insolvency practitioner to place the firm into voluntary liquidation.
Choccywoccydoodah had enjoyed close to two decades of sustained success. Off the back of a popular reality TV series, it had developed a cult status and attracted high-profile customer, including Kylie Minogue, Elton John, Simon Cowell and Johnny Depp. However, the company had endured a prolonged period of poor business and amid a “challenging trading environment” Choccywoccydoodah called in the liquidators. With the approval of its shareholders and creditors, Choccywoccydoodah’s liquidators realised the company’s assets, distributed the funds to its creditors and dissolved the company.
Court liquidation (insolvent companies)
Court liquidation commences when a petition is launched by creditors, shareholders or directors to the local court asking it to wind up the company.
With court liquidations, it is the court that starts the liquidation process and the court that appoints a liquidator, albeit in an interim role. Once the interim liquidator has assessed the situation, he or she calls a meeting with the company’s creditors and the creditors appoint someone to act as the long-term liquidator. Once the company’s creditors have appointed a long-term liquidator, the process is the same as other liquidations. The liquidator liquidates the assets, distributes the funds and dissolves the company.
The only real difference between a court liquidation and a creditors' voluntary liquidation is the initial entry route, once in liquidation - they are the exact same.
Court Liquidation Case Study
On 31st January 2019, online lifestyle magazine The Pool filed for administration, citing net liabilities of £419,931, including nearly £85,000 owed to freelance writers and a five-figure loan to founder Lauren Laverne. The company’s director explained the decision, saying: “As a director and shareholder, I have a duty to do this as the business is now insolvent and we have exhausted all rescue ideas/plans.”
Two months later, after no improvement in the company’s financial position, the High Court issued a winding-up order, following a petition from HMRC over unpaid taxes. The order pushed The Pool into compulsory liquidation, ending the online magazine’s four-year run.
Spongebob plan (insolvent companies)
Six years ago, an internet user by the name of Spongebob posted a guide on how to close a limited company when you can’t afford an insolvency practitioner. The guide, which became known as the Spongebob Plan, spread like wildfire on internet forums as a low-cost closure method for insolvent companies.
Two years ago, we wrote a full analysis of the Spongebob Plan, covering how it works and the risks involved. Here is a quick recap of the process. (Note: the full plan is five steps but we have removed two as they are not relevant to Scottish businesses.)
- Cease Trading: Stop trading immediately. Stop taking on new contracts, stop making sales and stop all long-term work.
- Write to Creditors: Inform your creditors that you are insolvent and do not have the funds to pay your debts. Also, tell your creditors that your company will either be struck off by Companies House or wound up by the courts.
- Apply for Strike-Off: Three months after you’ve ceased trading, you can apply to Companies House to have your company struck off the register.
Despite its cult online status, the Spongebob Plan has several serious flaws. Most seriously, it ignores the director's duties. If executed poorly, the Spongebob Plan can open up directors to serious penalties, including personal liability for company debts. For a full analysis of this closure method, see our article Is the Spongebob Plan a Good Idea?
Is your company in trouble?
If you are contemplating closing your company, it’s important to seek out the correct advice and support, especially if your company is struggling financially. For struggling companies, closure is just one option. Ideally, directors will seek help long before liquidation is the only option.
However, the success of a rescue will come down to the skill and experience of the insolvency practitioner and the time they have available. Choose the right person and give them enough time and they will be able to save a business — so long as there’s a viable business there.
The most important piece of advice I can give you is to seek help as soon as you suspect your business is in trouble. As I said before, the more time an insolvency practitioner has to work with you, the more likely they are to achieve a positive outcome so don't put off seeking help until the situation is hopeless. Contact our team today for free, confidential advice to see how we can help.