Closing a business is never easy, but it can be even more challenging when the company has outstanding debts.

If you’re the director of an insolvent business with debts that you know you can’t pay, closing it may be the best option so that you can put creditor pressure behind you.

This article will outline the steps involved in closing the business, and discuss the challenges and considerations that may arise.

We will also provide tips and advice on how to navigate the process and minimize potential negative impacts.

We are a licensed and regulated firm of insolvency practitioners. Please reach out to us to discuss how we can help close your company in the most efficient, cost-effective way.

Closing a Company with Debts Using Voluntary Liquidation

Closing down a company with debt requires you to use the creditors voluntary liquidation (CVL) process, which must be done in conjunction with a licensed insolvency practitioner.

This approach ensures that an impartial third party, the insolvency practitioner, ensures the maximum possible return for creditors. Once they’ve been paid with whatever funds are available, any remaining debt is written off.

While some websites suggest you can simply dissolve a business with debts, HMRC makes it clear this is not the case, and they will object to any attempt to strike off the company.

If you do nothing, a credit will eventually force you into compulsory liquidation – a much more challenging scenario for directors – so a CVL is your best option.

How to Close Down a Company with Debts using a CVL

The creditors voluntary liquidation process involves appointing a licensed insolvency practitioner. As soon as the Insolvency Practitioner is appointed, you, as director, no longer carry on with your role as director and you also have no rights to interfere in any aspect of the company closure.

You will have a legal duty to cooperate with the Insolvency Practitioner. The Insolvency Practitioner will almost certainly require you to agree to pay his or her fees and possibly deposit an amount with him or her.

After that, the Insolvency Practitioner will:

  • Seek to ascertain what assets the company has and what the debts are.
  • Deal with creditors on your behalf
  • Send you a questionnaire about the period leading up to insolvency as the Insolvency Practitioner is legal required to consider whether you have acted appropriately once you knew or ought to have known the business was insolvent.
  • Advertise the decision to liquidate in the London Gazette, the official journal of public record
  • Sell any assets and distribute funds to creditors in order of priority
  • Ultimately, strike off the company from the Companies House Register

Any insolvency process will require the insolvency practitioner to investigate the actions of company directors in the period prior to insolvency.

The licensed insolvency practitioners will be looking for evidence that directors acted in the best interests of creditors at all times.

Potential Risks and Liabilities for Directors

In principle, the limited company structure, whereby the company is separate legally from it’s owners, is designed to prevent corporate insolvency from  resulting in personal debt. Assuming no malfeasance or wrongful trading is found and the directors have not given personal guarantees they can therefore lawfully walk away from business debts without worry.

However, where it is discovered that directors have placed their own interest over creditors subsequent to becoming aware of the company’s financial position, personal liability can become a factor. Wrongful trading is a civil offence, while the more serious fraudulent trading is considered a criminal offence.

Closing a Limited Company with Debts to HMRC

Closing a company with debts to HMRC is best achieved by a creditors voluntary liquidation, after which debts will be written off, and the company closed.

If your company owes money to HMRC, you should be even more mindful to initiate a CVL before compulsory liquidation is forced upon you: HMRC are the UK’s largest issuer of winding up petitions.

HMRC’s position as preferential creditors meaning they are one of the first to be paid from any assets, after those with security over an asset.

HMRC explains their position as preferential creditor here.

FAQs

Will all of the company’s debts be paid off before the company is closed?

If the assets are sufficient to pay off all the debts, then all debts will be paid off before the company is closed. However, if the assets are insufficient to pay off all the debts, some creditors may not be fully repaid. In this case, the company will be closed and the creditors will face losses. All remaining debts (unless personally guaranteed) end when the company is closed.

In a voluntary liquidation, the liquidator will be responsible for selling off the company’s assets in order to pay off its debts. The liquidator will typically begin by identifying and valuating all of the company’s assets, which may include property, inventory, equipment, and accounts receivable. They will then take steps to market and sell these assets to the highest bidder.

The liquidator may choose to sell the assets through auction, private sale, or a combination of both. Depending on what will yield the best results, they may also sell the assets in bulk or piecemeal. The liquidator will use the proceeds from the sale of the assets to pay off the company’s debts, starting with secured and then unsecured creditors. Any remaining funds will be distributed to the shareholders by their shareholdings.

The liquidator will contact all known creditors, providing them with information on the liquidation process and how to make a claim.

The notice will typically include the following information:

  • The date the company went into liquidation
  • The name and contact information of the liquidator
  • Details of the claims process, including deadlines for making a claim and the documentation that will be required
  • Information about any meetings or other events that will be held in relation to the liquidation
  • Instructions on how to check if a claim has been accepted or rejected

When a company is closed, its employees will typically be made redundant, which means that they will lose their jobs. The liquidator will be responsible for providing the employees with information about their rights, including any redundancy pay or other benefits to which they may be entitled. The amount of compensation and the type of support provided will vary depending on th