Cease trading: How to close down a limited company

This article will explain what it means to cease trading, and what the ramifications are for both company directors and creditors. 

Companies can cease trading for various reasons including a director’s retirement or ill health, ongoing financial problems, or simply because the company serves no further purpose.

When a business is profitable, ceasing to trade can be a precursor for closing down the company via dissolution or Members’ Voluntary Liquidation (MVL).

In an insolvent scenario, it is likely that a formal insolvency procedure such as a Creditors’ Voluntary Liquidation (CVL) will be entered into following the appointment of a licensed insolvency practitioner

What does cease trading mean?

Ceasing trading meaning is a term used when a business stops running. Employees are laid off, assets sold and, in many cases, the business name will be struck off the register at Companies House.

This usually happens for several reasons:

• the directors have reached the point of insolvency
• directors are not in debt but choose to shut the business due to retirement, health issues or simply because their interests have moved elsewhere

Consequences

• If the ceasing to trade is voluntary, the directors will sell off any company assets and distribute the proceeds amongst shareholders before closing the company down
• If the company is insolvent, the asset sale must be handled by an insolvency practitioner who will ‘liquidate’ before distributing the proceeds amongst creditors, by order of preference.

Why Might A Company Cease To Trade?

There are lots of reasons why a business might cease to trade. It could be that the company directors want to retire and there is no one to carry the business on, or simply that the directors want to move on to something new. Alternatively, the business may no longer be financially viable and the directors have decided to cease trading voluntarily so that it can be closed down.

In some cases, an insolvent business may be forced to cease trading by its creditors (parties it owes money to). If the company does not pay the money it owes to creditors such as trade suppliers or HMRC, they can take legal action in the form of a winding up petition. A judge will hear the case and if they rule against the insolvent business, a winding up order will be made and the company must cease trading immediately before being closed via compulsory liquidation.

What Happens When A Limited Company Ceases To Trade?       

When a limited company ceases to trade, all business comes to an end. Employees are made redundant, outstanding debts must be repaid and the assets of the business will be sold. If the business is solvent, the proceeds of the sale of assets will be distributed among the shareholders according to their percentage of the shareholding. If the business is insolvent, the money raised by the sale of company assets will be distributed between its outstanding creditors. The company can then be registered as dormant or removed from the Companies House register, in which case, it will cease to exist.

The company can then either be registered as dormant or, if it is unlikely to be required again in the future, its directors can wind Creditors are paid, employees let go and the company removed from the register held at Companies House. At this point it ceases to exist as a legal entity. Any assets are sold and the proceeds will be distributed accordingly.

In the event of a solvent company being liquidated its assets will be distributed among shareholders according to their percentage shareholding. When an insolvent company is liquidated, however, any company assets will be distributed between its outstanding creditors according to a designated hierarchy.

The process to liquidate can take seven days to place the company into liquidation, once a liquidator has been appointed they will keep the case open between 6 and 24 months to carry out their investigations.

If you have made the decision to ceasing trading, whether your company is solvent or insolvent, seeking the help and advice of a licensed insolvency practitioner is strongly advised.

Taking specialist advice means you will be taking the correct steps to close down your company in the correct manner and also ensure any outstanding creditors are treated fairly

How Does a Company Cease Trading?

Believe it or not, in many cases it’s a lot easier to set up a limited company than it is to cease trading. That’s due to the various procedures that can be used to wind up a solvent and insolvent business, as described below.

There is likely to be a delay before anything happens but there should be a notice in the press, locally if it is a local trader and in the London Gazette, giving information about the current situation together with details about a creditors’ meeting. All creditors can go, and you should go if you can. At the meeting, an insolvency practitioner or administrative receiver may be appointed.

A receiver does not wind up the company but is appointed to collect money owed to the company or to raise money from the company to pay the creditors. A receiver may trade in the company’s name, sell assets, sell the company or make other arrangements. If these fail to save the company a liquidator is appointed who is a licensed insolvency practitioner.

Ceasing Trading Via a Creditors’ Voluntary Liquidation (CVL)

A corporate voluntary agreement (CVL) is an insolvency procedure that’s designed for insolvent businesses. In a CVL, the directors of an insolvent business voluntarily cease trading and “wind up” the business, using the value of the business’s assets to compensate creditors. Ceasing trading via a CVL is a common option for insolvent businesses that aren’t commercially viable, meaning they are unlikely to recover financially. A CVL often occurs after a long period of pressure and/or legal action from creditors to recover debts.

To close via a CVL, your business will need to be cash flow or balance sheet insolvent, meaning it can no longer afford to pay its creditors. If you believe that your business is insolvent and want to cease trading via a CVL, please contact our insolvency team for more information.

Ceasing Trading Via a Members’ Voluntary Liquidation (MVL)

A Members’ Voluntary Liquidation (MVL) is a legal process for closing down a solvent business. Unlike a CVL, the MVL process is used for businesses that can successfully pay their creditors using existing assets and cash flow before ceasing trading. If your business is solvent and you want to cease trading, the MVL process allows you to do so while extracting profits from the business. There are certain tax advantages to the MVL process, potentially making it a good option if your business has significant assets.

For example, cash distributed to shareholders via an MVL is subject to capital gains tax, rather than income tax. In certain cases, businesses closing via the MVL process may be eligible for entrepreneurs’ relief, lowering their capital gains tax rate. Entering into an MVL is a complex process that requires an insolvency practitioner. If you have a solvent business that you’d like to close and want to learn more about using an MVL to cease trading, please contact our team for more information.

Ceasing Trading Via Company Dissolution

Company dissolution is a legal process that allows you to close down a solvent business. The dissolution process is typically simpler than liquidation and maybe the most effective option for your business if it’s financially solvent and has no debts. Your business needs to take several steps before it ceases trading via dissolution. For example, you will need to pay any outstanding taxes, pay employees in compliance with redundancy law, deregister the company’s payroll scheme and VAT and close the company’s bank accounts.

You’ll also need to make sure that any business assets are distributed amongst shareholders in advance, as ownership of company assets will pass to the Crown following dissolution.  Dissolving a company has advantages and disadvantages, and may not be the best option for every business. If you’d like to learn more about the dissolution process, please contact us for further information.

Register the Company as Dormant

If you have a business that has ceased trading but you may need again, you can register it as dormant. You may choose to keep a limited company dormant to protect a brand, prevent the same name being used by another business or to hold intellectual property. 

To make an active company dormant, you must cease trading, close any existing bank accounts and ensure that all bills, liabilities and bank charges are paid in full. You should also cancel standing orders and direct debits and advise suppliers and customers that the business is closing. You must also inform HMRC and file a final company tax and VAT return, pay any tax due and cancel your VAT registration.  

For the company to remain dormant, no transactions or trading can occur and you must file dormant accounts with Companies House every year, which should include a balance sheet and an annual confirmation statement. To make the company active again, just contact HMRC within three months of recommencing trading. 

Company Dissolution

If your company is solvent i.e. can repay its debts, and you are sure it will not be needed again, you can apply to have it struck off the Companies House register via a process called company dissolution. Before the company directors can apply to have it struck off they must cease trading, make the employees redundant, pay any tax liabilities owing, repay the company’s debts and sell its assets. The money raised by the sale of assets will be distributed among shareholders according to their percentage of the shareholding. 

Form DS01 online can then be completed and submitted to apply for strike off, and as long as the form has been completed correctly and no one objects, the company will be struck off the Companies House register and will cease to exist.

Forced to Cease Trading

Of course, if you receive a letter such as a winding up petition because of unpaid debts, a judge will hear the case. Where it is ruled against you, you could find yourself with a ‘winding up order’ which means you must cease trading immediately, prior to compulsory liquidation

How can I cease trading?

It is never quite as simple as all that! Just ceasing trading does not make the problem of debts go away, however, it can stop a bad situation getting worse. As such, it will may help avoid you trading whilst insolvent, or more importantly may help avoid a claim for wrongful trading. If the company only has a few hundred pounds of debts then it may be that a dissolution will be an option. However you will need to write to all the creditors, customers, HMRC etc.

Dependent on your situation there are a number of ways to cease to trade, for further advice simply contact us directly on the number above or complete the enquiry form.