If you are the director of a limited company with debts, the pressure can be overwhelming.
This article will explore the various courses of action when you cannot pay company debts, and how to achieve them.
Who is Liable for the Debts in a Limited Company?
The good news is that the limited company structure is specifically designed to maintain a separation between corporate and personal finances.
If you are sole trader whose business runs into difficulty there is no legal distinction between your business and personal expenses. But with a limited company there is ‘limited liability‘ for company debts.
This means that, unless you have behaved wrongfully or fraudulently, the company debts can be entirely written off without it affecting your personal finances.
When Can Directors be Made Liable?
Insolvency practitioners have a responsibility to investigate directorial conduct as a part of their work. Where they find evidence that the directors placed their own or other interests before those of creditors, after becoming aware of being insolvent, charges of wrongful trading may follow.
Wrongful trading can mean directors being held personally liable for some or all of the limited company debts.
What Happens When a Limited Company Cannot pay its Debts?
Once the directors realise that the company is officially insolvent, you should follow this process
(1) Directors should understand their legal responsibility to put creditors first, and keep a clear and well documented record of steps taken from the point of insolvency.
(2) Make contact with an insolvency practitioner such as ourselves to strategise the best approach based on the level of debt, the viability of the business, and the level of creditor pressure.
(3) If the company can be rescued, they will likely recommend going into administration, a Company Voluntary Arrangement, or potentially alternative finance.
(4) Where it is concluded that the company has come to the end of its natural life, the recommendation will be to voluntarily liquidate which means the directors powers will cease, assets will be sold to pay creditors and the company will be struck off the register at Companies House.
(5) Any debt that cannot be paid via asset liquidation will cease with the closure of the company. Assuming directors have not been accused of wrongdoing, they are entirely free to become director of another company.
What Can a Creditor Do Against Unpaid Debt?
Creditors have a number of options available to them to recoup what is owed.
Statutory Demand Letters – A formal written letter to demand payment of a debt. Read more about Statutory Demands against a company.
County Court Judgement (CCJ) – The creditor may petition the court to issue a judgement against you for non payment. While these alone cannot compel you to pay, they will impact company credit score and lay the ground for a Winding up Petition. Read more about CCJ’s against a Company
Winding up Petition – These are a critically serious threat to a limited company, offering a 7 day window to pay your debt before being heard in court at the winding up hearing. If the judge rules against the company at this hearing, he/she will issue a winding up order which means the immediate, compulsory liquidation of your limited company. Read more about Winding up Petitions.