It is possible to close a limited company with debts, assuming the correct rules are followed.

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 the creditor pressure behind you.

Below, we’re explain how this works, and the correct process to follow. We are a licensed and regulated firm of insolvency practitioners who specialise in helping directors find positive solutions to debt.

Closing a Limited Company With Debts

When a company has no debts or assets, and hasn’t traded in at least 3 months, it’s possible to close it by striking it off at Companies House.

Closing down a company with debt requires you to use the creditors voluntary liquidation 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 corporate creditors. Once they’ve been paid whatever funds are available, any remaining debt is written off.

What’s the Process of Closing Down a Limited Company with Outstanding Debt?

The creditors 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 a Limited Company with 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.

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.