Can I Close My Limited Company And Open A New One?
Is your business struggling with unmanageable debt or has simply reached the end of its life? In this guide, we’ll explain how to legally close down your limited company and start again – is it allowed, what are the rules and how can you prepare for a fresh start?
Summary: Closing your limited company and opening a new one
- You are legally allowed to close down your limited company and open a new one, provided that you use formal processes and stop trading immediately, as soon as there is no reasonable prospect of avoiding insolvency
- The creditors become your main priority. Ensure you act to minimise their losses and avoid wrongful trading
- Assets must be purchased at fair market value following an independent valuation
- You are prohibited from using the same company name under Section 216 of the Insolvency Act 1986 after an insolvent liquidation
- It’s advised to get in touch with a qualified licensed insolvency practitioner to help avoid any serious consequences
Am I allowed to close my insolvent company and open a new one?
The short answer is yes, but there are significant legal considerations. If your company fails, UK law will not stop you from trying again. The “phoenixing” process is a common rescue tool used to save jobs and maintain trade.
It allows a new company to rise from the assets of an insolvent one. For more details, read our dedicated guide: What is a phoenix company?
However, the law does not permit simply abandoning a debt-burdened company and opening a new one as a means to avoid creditors.
Key considerations and legal rules
To start again without any legal implications, directors must adhere to strict requirements:
Director duties
Once you realise you cannot pay debts, you must stop trading immediately. Failure to do so can result in a worse position for the creditor, and can lead to accusations of wrongful trading.
Reuse of company names (Section 216)
Under Section 216 of the Insolvency Act 1986, it is a criminal offence for a director of a liquidated company to use a “prohibited name” (or one that is substantially similar) for five years. Breaking this rule can lead to personal liability for the new company’s debts. You must give a formal notice to all creditors or apply for “court leave”.
Fair asset valuation
It’s a common misconception that you can just “carry over” assets from the insolvent company to the new one. In fact, these assets belong to the creditors of the insolvent company. Assets must be purchased by your new company at a fair market price. This is a transparent transaction where the proceeds are used to pay the creditors fairly.
HMRC and banking requirements
If you have a history of insolvent businesses, HMRC may require a security deposit for VAT or PAYE. This serves as a guarantee for them if the business were to go insolvent again.
You also cannot use your old company’s bank account – you will need to open up a new account as a new entity. Be prepared for fresh credit checks and scrutiny from the banks.
Outcomes of failing to follow procedure
So, what happens if you choose to ignore the legalities of closing down your limited company and opening up a new one?
- You could be personally liable for any of the insolvent company’s debts
- You may be banned from acting as a director for up to 15 years
- You must pay fair value for assets. Failure to do so can lead to liquidators reversing the sale and holding you liable for the deficit
How to close down a solvent company and open a new one
If your business is ‘solvent’, meaning it can pay all bills and the value of assets exceeds liabilities, the process is equally as regulated.
To do this, you might do one of the following:
Member’s Voluntary Liquidation (MVL)
If your business has more than £25,000 in retained profits, an MVL is usually the best route to take. A licensed insolvency practitioner can help lead this process.
To use this route, you will need to sign a document called a Declaration of Solvency. This is a legal promise that your company is able to pay off all remaining bills and interest within a year. The good news is that instead of paying a high tax rate on your final profits, they are treated as ‘Capital Gains’, which carries a lower tax rate.
For more details on this, please read our article: What Is A Declaration Of Solvency In An MVL Procedure?
Voluntary Dissolution (Strike-off)
If your company has assets less than £25,000 you can simply apply to Companies House to have the business name “struck off” the register. This might be a cheaper option, however, you may not get the same tax break as with an MVL.
Note: you can only do this if you haven’t traded or changed the business name for at least three months.
How to liquidate a company with debts
If your company has debts, you cannot simply close it by applying to be struck off the register. You must follow a formal insolvency process to protect yourself from personal liability and ensure creditors are treated fairly.
At Hudson Weir, we specialise in Creditors’ Voluntary Liquidation (CVL). This is a common and effective way for directors to deal with an insolvent company while maintaining some control over the process.
This step is taken by directors to appoint a licensed insolvency practitioner to wind up the company. You can rest assured that you are fulfilling your legal duties to creditors and protect yourself against wrongful trading accusations.
How to prepare for a fresh start
Help from trusted licensed insolvency practitioners is key to a successful transition. It’s important to seek advice early.
Be sure to document everything, keep receipts, and make sure financial records are up to date to prove that assets were sold at a fair price.
An insolvency practitioner can also help you ensure that all legal notices regarding the new company name are filed correctly and on time.
Further information
If you found this article useful, in other guides we address a wide range of common queries including:
- Putting Personal Money Into A Limited Company
- Is There A Penalty For Not Issuing Payslips?
- Active Proposal To Strike Off: What Happens If The Action Is Suspended?
We can help if you’re preparing for a company liquidation or company administration and have concerns about the director’s conduct report process.
Our licensed insolvency practitioners can provide more detail about what the conduct report involves and guide you through your responsibilities. To find out more, please contact us.
