Closing a company -- more of your key questions answered

(Continued from yesterday)

9. How is a liquidator engaged/appointed in an MVL?

Ordinarily, an introduction to an Insolvency Practitioner (IP) is made by an accountant when it is identified that a company is surplus to requirements with over £25,000 distributable assets.  The IP will then contact the director to discuss the process, ensure that the test of solvency can be met, and ensure that the director understands the process.

Once a liquidator is appointed, the assets of the company vest in them and there is no mechanism for the liquidation to be stopped without a court order. Upon the appointment of a liquidator, the powers of the director(s) cease (although their duties do not).  It is therefore not a decision to be taken lightly, and all circumstances must be considered.

Once the initial discussion is concluded, the IP’s firm will be engaged by the company to assist the director(s) with taking the necessary steps to commence the liquidation process. At this time, various pre-appointment identity and other standard checks are completed, similar to those completed when engaging a solicitor. 

Upon completion of those checks, the engagement will proceed to the appointment of a liquidator. In this regard, the IP’s firm will assist the directors with taking the following steps:

• Holding a board meeting where the directors formally resolve to start the liquidation process;
• Preparing a declaration of solvency to be sworn in front of a solicitor – this is the director’s confirmation that the company is solvent, i.e. that it can pay its debts within 12 months;
• Inviting the shareholders to pass a resolution appointing a liquidator.

10. What’s next once the IP is appointed?

Once appointed, a liquidator will take the following to comply with statutory filing and advertising requirements:

• Filing appointment paperwork and the declaration of solvency with the Registrar of Companies;
• Placing an advert in the London Gazette (on not less than 21 days’ notice) for any creditors to prove their claims in the liquidation;
• Informing HMRC and any creditors or regulatory bodies of the liquidation.

The liquidator will realise the assets of the company in order to distribute them to creditors (if required) and shareholders thereafter. In most contractor scenarios, the assets comprise only of cash at bank, or other sundry assets. 

If there are any creditors remaining at the date of liquidation, their claims will be paid by way of an unsecured distribution by the liquidator and statutory interest at 8% is payable on every claim accruing from the date of liquidation until it is paid. 

Once all liabilities are paid and tax clearance is obtained, the liquidator will distribute the remaining assets to shareholders, either ‘in specie’ (i.e. in their current form) or by way of cash payments. It is possible to declare interim distributions prior to tax clearance being received, provided an indemnity is executed by shareholders to protect the company from any subsequent claims which may be received.

When all matters are resolved, and confirmation is received from HMRC that it has no outstanding returns or liabilities, the liquidator will prepare a proposed final account and deliver this to shareholders. Ordinarily, if the tax affairs of the company are up-to-date on liquidation, clearance can be obtained within three to six months of the appointment. 

When a proposed final account is received by the shareholders, if they confirm their agreement to it, the liquidator can deliver a final to the Registrar of Companies thereby concluding the liquidation.  Alternatively, a liquidator can deliver a final account once a period of eight weeks has passed, in order to give the shareholders the opportunity to raise any queries.

The liquidation is concluded upon the delivery of the final account to the Registrar of Companies and the company will dissolved three months after it is filed. An annual report will be required if it is not possible to close a liquidation within a year, however, this is relatively rare in straightforward contractor scenarios.

11. What are the costs of an MVL?

The remuneration of the liquidator is agreed between the liquidator and the shareholders. This is ordinarily carried out on a fixed cost basis, net of VAT and disbursements. The specific cost is dependent on the complexity of the affairs of the company and the number of shareholders, but only minimal information is ordinarily required to provide a quote.

Where a company is VAT-registered, it is ordinarily possible to recover VAT paid on liquidation costs, which will be distributed to the shareholders as cash prior to the closure of the liquidation.

12. What steps should be taken before liquidation?

To minimise liquidation costs, it is prudent for affairs to be as straightforward as possible, this will include:

• Collecting in any debts payable to the company;
• Finalising any employment matters;
• Selling or otherwise dealing with the physical assets of the company;
• De-registering for VAT (once all assets are dealt with) and PAYE;
• Submitting a Corporation Tax return for the final trading period and paying any liability;
• Paying all taxes and any other liabilities owed by the company.

It is important that your accountant is kept appraised of the situation and your intentions, in order that the above can be dealt with appropriately.

13. What about director’s loan accounts?

A liquidator will deal with whatever assets remain at the date of their appointment and can make distributions ‘in specie’. This means that an asset is distributed in its existing form rather than being collected/sold and the cash realised being distributed to the shareholder.

It is not uncommon for there to be loans owed to a company by its directors and a liquidator can transfer the benefit (i.e. the right to collect) the loan to its shareholder. Where the director and shareholder are the same person, this has the effect of discharging the loan.

But contractors beware. Recently, HMRC has brought a test case seeking to reclassify the distribution of a loan account to be income rather than capital (and therefore taxable at the dividend rate). Therefore, wherever possible, it is prudent for loan accounts to be repaid prior to liquidation.

Know before you close

The guidance within this two-part overview of winding-up a company will hopefully provide contractors with some parameters, and a guide through the maze of the solvent liquidation process, in circumstances where a limited company loses its reasons for being. That may be because of the spectre of private sector IR35 reform, or it may not be.

For many contractors, the decision to close will be driven by the financials of the company and in the vast majority of cases, if there is more than £25,000 of assets left upon closure, a solvent liquidation is likely to provide the best outcome.

Although liquidation is not a matter to be taken lightly, and contacting an Insolvency Practitioner may seem a daunting prospect, experts such as us are ready to try and take the pain out of the process and ensure you are supported in what could be your company’s final days.  

Editor’s Note: This is the final part of a two-part guide, by Opus Restructuring & Insolvency director Gareth Wilcox, addressing the top questions contractors have about the process of shutting down a limited company. Read Part 1 here.