If you’re the director of a UK company, this article will help you understand the process of closing down a company with debts.

We’ll cover the options, the steps to take, the relevant laws, and the consequences for you as directors.

Can you close a limited company with debt?

When a limited company owes money it cannot pay, the legal structure itself offers ‘limited liability’ for these debts so, in principal, closing the company is a reasonable approach to getting rid of the debt.

That said, it’s not as easy as simply striking it off or dissolving it at Companies House yourself, and the debt magically disappears.

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

So the correct answer to this question is yes you can close the company, assuming you do it via the appropriate method, known as creditors voluntary liquidation.

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

Using a CVL to Close Down a Limited Company

The voluntary liquidation process involves appointing a licensed insolvency practitioner who will:

  • Deal with creditors on your behalf
  • 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.

Are Directors Liable for Limited Company Debts?

In principle, the limited company structure is designed to prevent corporate insolvency from precipating personal debt. Assuming no malfeasance or wrongful trading is found, directors can therefore lawfully walk away from business debts without worry.

However, where it is discovered that directors have placed other interests 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.

Wrongful trading might result from even paying a particular supplier over another, for example, since that is known as making a ‘preference’ and is hence unfair for the rest of the creditors.

Or it could result from a director paying their own salary from the company bank account while knowing that debts were owed to creditors which would likely never be paid.

Of course wrongful trading, in practice, is dificult to prove but nevertheless it’s a serious area of concern and, as such, directors should take particular caution to act prudently if the company appears close to insolvency.

You can always make contact with us at any time for practical, confidential advice about your situation with no strings attached.

What Happens if I Dissolve my Limited Company?

When a director of a limited company with debts attempts to simply dissolve the company, one of several things will happen.

Most likely you will receive an Objection to Company Strike Off letter once it had been picked up that the company has outstanding creditors. HMRC has a employees who work closely with company house to ensure that Strike Off applications conform with the statutory requirements.

And to quote HMRC’s own site on the matter

Can HMRC investigate a dissolved company?

In rare occasions, the objection to strike off is missed and the company is actually dissolved. However, any creditor (including HMRC) has simply to apply to have the dissolved company reinstated to the register if proper procedure hasn’t been followed.

This could even happen 20 years after the initial strike off.

At this point, any liabilities or penalties will still apply, including personal liability for corporate debt if the directors are found guilty of misfeasance.

Closing a Limited Company with Debts to Hmrc

It’s worth mentioning that HMRCare quite prepared to make examples of directors whom they feel have behaved unscrupulously, even when the process is not going to recoup them money.

HMRC has to be seen to enforce the statutory requirements for running a company in the UK and this is why they’re the UK’s biggest issuer of Winding up Petitions, the standard method for forcing a company into compulsory liquidation due to non payment of debts.

As such, if your company has debts your best option is to tak professional advice at the earliest opportunity, before closing the company via the correct legally prescribed methods.

Liquidations can usually be paid for from the realisation of company assets and there is also the possibility of directors redundancy pay, that can often provide a useful source of funds when the company itself has none.

Contact us to ask about your eligibility for this, we’re happy to advise on what you may be entitled to, as well as your best options to resolve your debt.