A guide to closing a UK limited company, often in order to assist a wider operational restructuring.
In this article, Matt Leech looks at how a solvent UK subsidiary can be closed down if it is not possible to divest it for value.
How to close your UK subsidiary
There may come a time in the life cycle of a company, whether standalone or part of a wider group, to consider whether that company is still required or even viable. Is its contribution to group profit minimal? Does it consume cash or management time that could be better spent on more profitable and faster growing parts of the group?
Over the last couple of years a number of high-profile names have closed some or all of their UK operations. There are many reasons behind a company closing their UK subsidiary, which are often industry specific, but the financial rationale for having UK operations may not be so strong as it was several years ago.
So what preparations do directors need to take to wind down and close a UK subsidiary? This article considers solvent closures. If, during the closing process, it becomes clear that this is not possible, other articles in this series look at alternative options.
Click here to learn what the options are for insolvent business.
What to include in a ‘wind-down’ plan
It is essential that a robust wind down plan is formulated at an early stage, in preparation for the company to cease trading. As well as dealing with the operational affairs of the company, there can be legal risks for the directors if the assets and liabilities of the company are not properly attended to before a company is formally closed.
Click here to read our guide on when a director could be personally liable for a company’s debts.
It’s worth noting at the outset that a full consideration of the potential tax implications of any proposed closure plan will usually be a key driver for how the plan is structured. This could include stamp duty for property and share transfers, VAT’ for asset transfers, capital gains tax and tax on dividend distributions.
Gateley’s Tax team is regularly asked to assist before any closure plan is agreed.
What operational considerations should I look at?
Every company is different and will have its own unique mixture of assets and liabilities to be dealt with. The following is a starting point of matters to consider.
- Do you have a comprehensive list of customer and supplier contracts?
- Have all customer contracts been concluded? What is the ongoing risk of liability for current or future claims? Are there potentially contingent claims that haven’t yet crystallised? This is particularly important in subsidiaries that have a long trading history (or acquired companies that did).
- Are all supplier contracts paid up to date? What are the notice periods to terminate any ongoing supply agreements?
- Are all employee payments up to date, including holiday pay, sick pay, pension contributions and other benefits?
- Are there any other potential employee liabilities, for example ongoing or potential claims for unfair dismissal, discrimination, personal injury, etc?
- Is a redundancy programme required and what is the timeframe and cost for implementation?
- If the intention is to dissolve the company, all assets need to be realised, transferred, assigned or otherwise disposed of prior to the company closure, otherwise title risks passing to the Crown as bona vacantia.
- Assets to consider include:
- real estate – both freehold and leasehold (searches can be conducted at the Land Registry for registered land)
- plant and machinery (including any assets subject to lease/ hire purchase arrangements)
- work in progress
- book debts
- intellectual property (searches can be conducted at, e.g., the Intellectual Property Office)
- any contracts that you want to assign or novate into another entity
- any shareholdings in a subsidiary.
- Potential contractual and employee liabilities (as above).
- Have any guarantees been given by the company (including lease guarantees, contract guarantees, group company guarantees)?
- Are payments to HMRC (including VAT, PAYE, NIC etc.) up to date? It may be worth requesting HMRC’s formal consent to a dissolution of the company.
- Have business rates been paid up to date?
- Are there any intercompany liabilities that need to be addressed?
- Is there a secured lender? Do you need to agree on a protocol for repayment of all outstanding liabilities and release of all security?
- Close all bank accounts.
- Insurers should be notified of the intention to cease trading. Is run-off cover required?
- Inform any relevant regulatory bodies and ensure requirements under operating licences have been complied with.
- Ensure corporate governance is up to date (e.g. accounts are filed, company books and records are up to date).
There will be other matters that specifically apply to each company. It is worth taking professional advice on any wind down plan, to ensure everything has been fully dealt with before proceeding to closure.
Closing a company: strike off or solvent liquidation?
There are several options for the closure of a limited company once the wind down plan has been implemented.
Voluntary strike off
This is a relatively quick, simple and cost-effective procedure by which a company can be dissolved voluntarily by its directors and its name struck off the register of companies.
While a company is not technically required to discharge all its liabilities before it is struck off, a company must notify creditors before striking off. It is an offence not to notify known creditors where the directors are aware of any liabilities.
Any unsatisfied creditors, which can include contingent creditors whose claims have not crystallised at the time of strike off, can apply to restore the company to the register within six years of the dissolution (or at any time for claims for personal injury).
In addition, the Insolvency Service also now has the power to investigate the conduct of directors of a dissolved company without having to apply to restore the company to the register. If evidence of director misconduct is found, directors risk being disqualified from acting as a company director for up to 15 years.
The Business Secretary can also apply for an order requiring a disqualified former director to pay compensation to any creditors whose debts were not satisfied.
In practice therefore, as well as implementing a wind down plan for the business and a redundancy process for any employees, it is essential that directors ensure the company has satisfied all its liabilities before it is struck off the register, as set out above.
Members Voluntary Liquidation (MVL)
An MVL is a statutory process under the Insolvency Act whereby the assets of a solvent company are realised and the proceeds distributed to the company’s creditors, who are all paid in full. The process is managed by an appointed liquidator, who must be a qualified insolvency practitioner.
Before a company can be placed into MVL, the directors must swear a statutory declaration of solvency that they are satisfied the company will be able to pay its debts in full, together with any interest, within a maximum of 12 months from the commencement of the winding up. This must be accompanied by a statement of affairs, setting out the company’s assets and liabilities.
Once appointed, the liquidator will:
- collect in and realise the company’s assets
- send a request to all the company’s creditors to submit proofs of their respective debts
- distribute the proceeds of the company’s assets to the company’s creditors, with any surplus distributed to its members
- once the liquidation has completed, dissolve the company from the register.
A proposed liquidator will generally work closely with the directors of the company and its legal advisors in the run up to an MVL, to ensure the process is practical and tax efficient. It may be that certain assets and liabilities are best attended to before the company is placed into MVL, whilst others are best dealt with by the liquidator. A particular benefit of MVLs is that liquidators have specific powers to value and satisfy contingent liabilities, which is not available to directors.
The ultimate result will be that the company’s liabilities will be settled in full and the company will be dissolved from the register by the liquidator, rather than the directors. This removes much of the risk of a breach of duties by the directors.
An alternative option would be to simply leave the company dormant. Under the Companies Act 2006, a company is dormant during any period in which it has no significant accounting transaction.
Notice of dormant status can be given to Companies House in the next relevant annual return and to HMRC in the next tax return. The company can then remain dormant on the register and be reactivated at any time if needed.
The biggest drawback with this option is the lack of finality. There are still some requirements to provide annual accounts for dormant companies, which would need to be diarised and met. Even when dormant, the company will still need to have at least one director appointed.
Crucially, if a company is left dormant because there is a risk of contingent liabilities crystallising, then sufficient means to settle any such liabilities must be available to the company, whether by way of assets left in the company or indemnities granted by the parent or other group companies. A failure to do this would risk insolvency of the company and a breach of duties by the appointed directors(s).
Alternatives to wind down/ closure?
Until 31 December 2020, the Companies (Cross-Border Mergers) Regulations 2007 provided a framework, enacted from European law, to facilitate a cross-border merger where a UK subsidiary was owned by a European parent. However, after the Brexit transition period ended, these Regulations were revoked and cross-border merger is no longer possible for UK companies.
However, if the UK subsidiary of the business is no longer required, then one alternative could simply be to put it up for sale as a going concern. If there is a prospective buyer and, for example, the parent or group is comfortable for the business to continue trading under new ownership, then this could be a relatively quick option. A management buy-out by the company’s existing directors may be an attractive option to everyone.
A share sale would result in the whole business transferring to a purchaser. If only certain assets were sold then this would leave the remaining assets, and the company itself, still to be dealt with using one of the options above.