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 creditor pressure behind you.

Below, we’ll explain how this works, and the correct process to follow. We are a licensed and regulated firm of insolvency practitioners. Please get in contact to discuss how we can assist with closing your limited company in the most efficient, cost effective way.

Closing a Company Using Creditor Voluntary Liquidation

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 creditors. Once they’ve been paid with whatever funds are available, any remaining debt is written off.

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

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 willhave 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

Liquidation writes off all business debts, including those to HMRC. Any debts the company owes to HMRC, including unpaid taxes such as VAT, will 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 from any assets, after those with security over an asset.

HMRC explains their position as preferential creditor here.