There are many reasons for a business ceasing to trade, but in a company this has to be dealt with according to the rules. In this final chapter the various reasons are discussed in some detail and include:

• ceasing to trade
• disposing of your business
• planning your retirement
• going into voluntary liquidation
• suffering compulsory liquidation.

CEASING TO TRADE

There may be circumstances where you wish to close down your company and trade no more. Your business may be becoming unprofitable or overtaken by modern technology. You may wish to sell the shares or the assets to a competitor or just to a younger person. You may not be able to pay your debts or you may wish to retire. The fact is that whether a company is a success or a failure it is up to you what you do with it if you hold the power in the shares you own.

When the company is sold the shares pass to another shareholder who takes on all the responsibilities you once held. On the other hand if you clear the company of its assets and retain your shareholding you may wish to end its existence. If the company cannot pay its way the law gives you no alternative but to do something with the company.

This act of extinguishing the life of a company is known as liquidation and the process may be either voluntary or compulsory. The difference is explained in some detail later in the chapter.

DISPOSING OF YOUR BUSINESS

It is, of course, possible to dispose of your company at any time. You may have found a suitable buyer, or another company who wants to take you over. You may wish to retire and sell your interest or you may want to pack up and go. Whatever the reason the disposal must be orderly and some statutory procedures have to be followed.

When you are selling a business you must establish whether you are selling the shares in your company or only the assets. A potential buyer may want to take your company lock, stock and barrel and either purchase the shares or use an existing company to buy the shares, in which case the company would be wholly owned by another company and become a subsidiary of it.

Case study: Usha is pregnant

Usha is expecting her first child and, after long discussion with her husband, decides that she must shortly stop working. This is a blow to Hannah, who is really a ‘career girl’, and the partners have to decide what to do. They could close the business down but that would waste the time and effort they have put in. They compromise and Hannah agrees to raise the money to buy Usha out of the business. The shares will have to be valued and Usha agrees to employ a separate accountant to negotiate the deal on her behalf. The company will remain in existence and Hannah will eventually become the sole owner of the shares and the business.

Selling the assets

It could well be more advantageous for a buyer to take only the assets you own and incorporate them into an existing business. This may or may not include the goodwill (which can usefully be described as the ability to make a profit). You would be left with the company liabilities to pay and the money paid for the assets you sell. On the other hand you may sell the whole business, including goodwill, for a given price and finish up with a company which contains only cash. Whichever way the sale goes you will have achieved your goal of selling and be left with the money in your company.

The next problem is to get the money out. It could be used to invest in another business run through the same company. However, if you wish to remove the money from the company inevitably the taxman is hovering around to take a share of the spoils. Tax is normally only payable if you realise the gain and take it away. You can also obtain some relief from inheritance tax if you give away business assets.

Selling the shares

There is relief from tax, at least for a while, if:

• 1.You sell shares in an unquoted company.
• 2.You have been a full-time working director.
• 3.You have owned more than five per cent of the shares for more than one year.
• 4.You invest the money in another unquoted company.

If, however, you just wish to dispose of your shares and walk away you will be liable to capital gains tax on the difference between the value of the shares you bought and the value when you sold them. There is an indexation allowance for inflation during the period you held the shares. This is just like selling shares on the Stock Exchange.

You will qualify for concessions if you are 50 years of age or over and retiring as there are a number of reliefs available – for example, retirement relief. If you sell a business, give it away or sell off the assets after you have closed the business (for example, a family owned company) there will be relief if you owned shares in the business for more than one year.

The rules of taxation are somewhat complex and again you would be well advised to seek your accountant’s advice before being too hasty with your disposal.

PLANNING YOUR RETIREMENT

It is never too early to plan your retirement, however far away it seems. You will spend most of your time ensuring your company will be a success. If, when you retire, you sell it you should have a handsome sum of money to invest that will provide you with an income to live on. But don’t bank on it as it may not be worth enough when the time comes.

Very often you will have all the skills while you are working but when you leave the business there is no business left. On the other hand you may be forced to retire because of ill health.

What happens if your business is going through a hard time when you are taken ill? Or you suffer the ravages of inflation or recession? And what will happen if you just do not accumulate the amount of money you need to continue to live in the manner to which you have become accustomed?

The only way to alleviate this potential problem is to invest in a suitable pension arrangement.

The state pension

As an employee of your company you will be paying Class 1 contributions personally and the company will pay the employer’s contribution. You may also pay additional contributions as an employee and this will entitle you to the State Earnings-Related Pension commonly known as SERPS.

Personal pension

You can, however, opt out, or contract out, of paying for SERPS and redirect the additional national insurance contributions to your own personal pension. There is a limit on pension benefits which is reviewed annually.

The type of personal plan you choose must depend on individual circumstances and there is a number of providers such as banks, insurance companies, unit trust managers or building societies. You must shop around to find the most suitable.

Types of plan

General types of plan are:

• Unit linked – where you choose how your money is invested whether property, shares, currency, government stocks or a combination of all of them. Your potential pension fluctuates with the value of the units.
• With profits – where the insurance company invests your money as it thinks fit. There will usually be a guaranteed pension topped up with bonuses as the value of the investments increases.
• Without profits – where the pension is fixed and you know when you start what it will be.

Case study: Dean thinks about retirement

Although Dean has cash flow problems all the time he still makes profits, a phenomenon he finds hard to understand. ‘How can I make profits when I never have any money?’ His accountant explains that his money is always tied up in stock and debtors and until he gets his system for realising his cash working better and sooner he will continue with the problem. Now the question is how to alleviate the tax on his profits. His accountant suggests, despite his young age, that he might like to start a modest pension scheme which will be wholly allowable against his profits for tax purposes. He agrees and finds himself discussing the proposition with an independent financial adviser recommended by his accountant.

Occupational pension schemes

You can also arrange an occupational pension through your company. It has to be approved by the Inland Revenue to qualify for tax concessions and may be administered through an insurance company or by administering the investments yourself. There are advantages to having such a scheme:

• there is no limit on the contributions and this enables you to put in much larger sums when business is good
• the fund can be used to provide the capital for buying premises or major items of capital expenditure
• up to half the fund can be loaned to the company.

This scheme is a specialised method of acquiring a pension and you will be well advised to consult your financial adviser before doing anything.

Tax reliefs

Any tax relief you receive will always be at your highest rate and, for example, if you are a 40 per cent tax payer it means that you will only pay £600 for every £1,000 of pension you invest in. It is indeed a bargain.

Remember

• Start your plans early, picking the most suitable plan for you.
• Take advice.

GOING INTO VOLUNTARY LIQUIDATION

A company may by resolution go into a voluntary winding up or liquidation. This may be done because the company is no longer required, because it is insolvent or likely to be or it may want to reform in a different way.

Members’ voluntary liquidation

This winding up may be carried out by the members provided the directors are of the opinion that the company can pay all its debts within a period of twelve months. If so the directors call an extraordinary general meeting and make a statutory declaration of solvency. Once this resolution is passed a liquidator can be appointed. Within 14 days a copy of the resolution must appear in the London Gazette(the official announcement of such matters) and a copy sent to the Registrar of Companies. Also the liquidator must give notice of his or her appointment to the Registrar and in the London Gazette within 14 days.

If the directors make a statutory declaration without reasonable justification and the company cannot meet its debts, then they can be liable to fines or imprisonment.

The liquidator then uses his or her best endeavours to realise the company’s assets, pay the creditors, clarify any claims on the company and distribute the funds. Their fees and expenses take priority over all other charges.

Creditors’ voluntary liquidation

This will occur when the directors of a company are unable to declare their solvency. In these circumstances the creditors have a greater say in how the company will be wound up. The directors first call an extraordinary general meeting to consider the winding up in the context of not being able to pay its creditors. Within 14 days of this meeting the directors must call a meeting of creditors and present them with a financial statement of affairs, verified by affidavit, and answer any questions put to them by the creditors. A liquidator may have been appointed at the first meeting and if so the creditors may approve the appointment or appoint another in his or her place.

The liquidator then takes control of the company and realises the assets. After his or her expenses he or she will distribute the funds available paying in the following order:

• 1.His/her own fees and expenses as liquidator and the costs of the liquidation.
• 2.The preferential creditors which includes monies owed to employees and any rates or taxes due.
• 3.The secured creditors – ie those creditors with a charge over certain assets of the company.
• 4.The unsecured creditors – ie the rest of the people to whom the company owes money.
• 5.The balance, if any, to the shareholders in the proportion of their shareholdings.

The liquidator’s appointment must be advertised in the London Gazette, as with a members’ voluntary liquidation, and notified to the Registrar within seven days. The creditors may appoint a liquidation committee to monitor the work of the liquidator and, if thought fit, to fix his or her fees.

The end of the road

In both cases on completion of the distributions the appropriate forms, including a receipts and payments account, are submitted to the Registrar by the liquidator and the company no longer exists.

SUFFERING COMPULSORY LIQUIDATION

There can be circumstances where a company is wound up by the court. These include, amongst other things, where:

• the company passes a special resolution to that effect
• the company does not commence business within a year, or suspends its business for a whole year
• the company is unable to pay its debts
• the court is of the opinion that it is just and equitable that the company should be wound up.

The procedure is started by those persons entitled to present a petition to the court. They include the company, the directors, a creditor or creditors, any shareholder or the clerk of a magistrates’ court.

When the court makes the winding up order the Official Receiver becomes the liquidator of the company. The directors are required to submit a statement of affairs and be interviewed. The office receiver can then decide to call a meeting and ask the creditors and shareholders if they wish to appoint another liquidator instead. If the Official Receiver does not advise them of such a meeting 25 per cent of the creditors in value may require it to be done.

The liquidator, or the Official Receiver, will then carry out the liquidation of the company and realise and distribute the assets. The Registrar of Companies must be informed that a liquidator has been appointed and advertised in the London Gazette.

There is, however, usually a good reason why someone petitions to wind up a company and if fraud, embezzlement or any other crime where the directors are involved is suspected the liquidator must inform the Secretary of State for Trade and Industry and within six months produce the evidence for this. Equally the Secretary of State may have appointed Inspectors to investigate a company on the grounds that it has been fraudulently mis-managed and may petition if he or she thinks fit.

Any company finding itself in this position probably deserves what it gets.

Case study: Harry remembers

Harry once got involved as a shareholder by putting £3,000 in a company in the building trade. The directors of the company had systematically milked the company of its money by doing jobs for cash and pocketing the money without accounting for it in the books. When Harry found out, which was only because the company was having great difficulty paying its debts, he decided to petition the court to wind up the company. A liquidator was appointed and Harry was required to give evidence. He had a good knowledge of the customers the company was building for and spoke to each of them to find out the financial position of each job. It was obvious all the money was not being accounted for properly and he had witnesses to prove it. The company was wound up and Harry lost his money.

ACTION POINTS AND REMINDERS

• 1.Remember if you want to sell your business, you can sell the assets without selling the shares.
• 2.If you want to retire, is there enough value in your business for you to retire on?
• 3.Have you got a personal pension arrangement?
• 4.Does your company have an occupational pension scheme?
• 5.If you want to close your company down make sure the reasons are clear.
• 6.If your company cannot pay its debts you must close it down.
• 7.You will be forced out of business if you don’t.