If you’re the director of a UK company, this article will help you understand the process of closing down a company with debts, also known as liquidation.
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.
What about Debts to HMRC?
Liquidation writes off all business debts, including those to HMRC. Anything the company owes, including unpaid taxes such as VAT, will come to an end along with the company itself.
At the point of insolvency, anyone you owe money to becomes a creditor. During insolvency events, there is a strict order of priority in which creditors are paid.
Within this list, HMRC fall as preferential creditors meaning they are one of the first to be paid, after those with security over an asset.
HMRC explains their position as preferential creditor here.
Process of Closing 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.
Libility of Directors
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.
Closing Down a Company with No Debts
If the company has no debts and no assets, there will be no need to liquidate the company. Assuming it hasn’t traded in 3 months, and owes no money, it can be struck off the register at Companies House via the process known as dissolving a company.
If the company has assets, a voluntary solvent liquidation process known as member’s voluntary liquidation offers tax benefits.
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.