Closing a Company With Debts

Can I Close a Company With Debts?

Yes, it is possible to close a company even if it has outstanding debts, but there are specific procedures that must be followed.

In the UK, the primary method for directors to voluntarily wind down an insolvent company is through a process known as Creditors’ Voluntary Liquidation (CVL). This process allows company directors to take a proactive approach to dealing with debts, helping to mitigate the impact on creditors and ensuring a structured dissolution of the company’s affairs.

Any debts not paid for by selling company assets are written off with the closure of the company.

Another method, although not initiated voluntarily by directors, is Compulsory Liquidation, which occurs following a court order, often at the behest of creditors.

3 Ways to Close a Company With Debts

Creditors Voluntary Liquidation

Choosing a Creditors Voluntary Liquidation (CVL) is a step you should consider if your company cannot pay its debts and you want to close it down responsibly. This process must be carried out with the help of a licensed insolvency practitioner.

A CVL involves bringing in an insolvency practitioner to act as an unbiased third party. Their job is to oversee the process, making sure that everything is done fairly and that the creditors receive as much as possible from the company’s remaining assets. After the creditors have been paid from the available funds, any debts that can’t be covered are typically written off.

Doing nothing and hoping the situation resolves itself isn’t advisable. If creditors are pressing for payment, they may push your company into compulsory liquidation. This scenario is far less favourable for you as a director because it takes the control out of your hands and can lead to harsher scrutiny of your conduct. Opting for a CVL, on the other hand, is a proactive approach that can help protect your reputation and potentially avoid personal liability issues, making it the preferable route when facing insolvency

Strike Off

If your company has debts, but you wish to avoid the formalities and complexities of liquidation, one option is to settle those debts yourself and then apply for a “Strike-off” to dissolve the company. This approach can be both cost-effective and straightforward, provided you adhere to the following steps and requirements.

Firstly, you need to ensure that your company has ceased trading for at least three months. During this period, you must settle all debts and obligations, including payments to suppliers, creditors, and HMRC. Make sure to also fulfil any contractual obligations, such as employment contracts.

Once all debts are settled, you can apply to the Companies House for a Strike Off by submitting Form DS01. There is usually a small fee involved in filing this application. After submitting, you must also inform stakeholders, including creditors, employees, and directors, by sending them a copy of the form within seven days.

Note that even after dissolution, directors could be held personally responsible for any undisclosed debts or liabilities. Therefore, comprehensive record-keeping and documentation are imperative throughout this process.

NB: 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.

Compulsory Liquidation

If a company does not pay its debts, creditors, including HMRC, can petition the court to force the company to close. This process is known as compulsory liquidation.

When a company is subject to compulsory liquidation, it loses control over the liquidation process. A liquidator is appointed by the court, not the company’s directors, and the primary goal is to sell all assets to repay creditors. This can lead to a less favourable outcome for all parties involved, especially for company directors who may face scrutiny over their conduct leading up to the insolvency.

Can I Close a Company with Debts and Start Again?

When facing severe financial difficulties, company directors may contemplate not only closing the current business but also starting a new one. This approach allows for a fresh start, potentially free from the burdens of previous debts. However, it’s important to understand the legal and ethical considerations involved in this process.

Liquidating your existing company through a CVL and starting a new business involves several legal stipulations, especially concerning the reuse of a similar company name and the transfer of assets. The law aims to prevent “phoenixing”, a term used to describe the reformation of a company under a similar name to avoid debts. Directors must adhere to specific conditions under the Insolvency Act 1986 to legally start a similar business post-liquidation.

1. Purchase of Assets: If the new company wants to use the assets of the old company, it must be done at market value and typically under the supervision of the appointed insolvency practitioner.
2. Reusing a Company Name: There are strict rules about reusing or using a similar name to the liquidated company. Exceptions to these rules require specific legal processes and notifications to be followed, including court approval or a notice in the Gazette.

Closing a Company With Debts to HMRC

If you’re facing closure due to HMRC debts, you need to be cautious as HMRC is the UK’s largest issuer of winding up petitions. This is a method of using the court to force a company into compulsory liquidation.

Opting for voluntary liquidation before being forced into compulsory winding up allows directors to retain more control over the process.

To avoid this eventuality, You have two main options:

1. Settle the debts: Work with HMRC to make payment arrangements and then dissolve your company through Companies House.
2. Arrange a Creditors’ Voluntary Liquidation (CVL): Appoint an insolvency practitioner to sell assets and repay creditors, including HMRC, to the best of their ability.

What Happens to Debt When You Close a Limited Company?

When you close a limited company through a formal process like a Creditors Voluntary Liquidation (CVL), the assets of the company are sold off, and the proceeds are used to pay back creditors as much as possible. After this process, any debts that cannot be covered by the sale of assets are generally written off, effectively ending with the closure of the company. This means the company’s debts do not carry over to the directors personally, thanks to the protection offered by the limited liability structure, with notable exceptions.

If there has been wrongful trading, personal guarantees by directors, or overdrawn directors’ loan accounts, directors could be personally liable for those specific debts. Otherwise, the remaining unpaid debts are typically extinguished once the company is formally dissolved.

Can I Walk away From a Limited Company with Debt?

Yes, it is possible to walk away from a limited company, even if it has debts. However, there are some important things to keep in mind:

• If the company is insolvent, you may be held personally liable for its debts if you have not acted properly. This could include if you have continued to trade while the company was insolvent, or if you have misappropriated company assets.
• If you have given personal guarantees for any company debts, you will be personally liable for those debts, even if you walk away from the company.
• You must follow the correct procedures to close down the company. This involves notifying Companies House and HMRC, and settling any outstanding debts.

Advice on Closing a Company with Debts

If you’re considering closing your company due to debts, the most critical action you can take right now is to seek professional advice. At Company Debt, we can provide you with the bespoke guidance you need to navigate this challenging period with clarity.

We’ll help you understand the options available to you, such as voluntary liquidation, administration, or a Company Voluntary Arrangement (CVA), and advise on the most appropriate course of action for your specific situation. Of course, closure may not be the only option, there may be solutions involving business recovery and turnaround.

If you do decide to liquidate, personal guarantees, overdrawn directors’ loans, and misfeasance are significant areas of concern that need careful consideration to avoid personal impact and legal complications during the liquidation process.

FAQs on Closing a Company with Debts