Many directors facing significant creditor pressure wonder if it’s possible to simple liquidate a limited company, write off the debts, and start again.
There is a way of doing this, as this article will explain, but it’s strictly regulated and must be done according to the letter of the law.
These restrictions are there to prevent unscrupulous debtors using voluntary liquidation as a means of evading responsibility. Before the laws were tightened in this area,, the practice of ‘phoenixing’ – that is, forming a new company from the ashes of the old – was fairly prevalent. Section 216 of the Insolvency Act 1986 aimed to tighten up the legislation in this area considerably.
Starting a New Company Following Liquidation
The rules around starting a new limited company after liquidation are as follows:
- Directors cannot be director of a company with the same or similar name for 5 years.
- Directors cannot be involved with either forming or managing a new company with the same or related name.
Now this doesn’t mean you can’t liquidate the company again and start in a similar format. But it must be done according to a process known as a pre-pack sale, or pre-pack administation. This method involves selling the assets at fair value from the the old company to a new one. It does allow for the writing off of debts.
NB: all liquidations must be done using the services of a licensed insolvency practitioner. This is enshrined in the law because the use of an independent party ensures fair play for corporate creditors.
Reusing Company Names
Although its possible to reuse a company name there are imporant rules around this, principally to prevent the practice known as ‘phoenixing.’ This is where directors fold one limited company with debts and start a new one from the ashes that is identical or similar.
You can reuse a company name in the following circumstances:
(1) Business Asset Sale – You can reuse your company name if it’s sold as a business asset at fair value. You must advertise your intention in the Gazette, which is the official journal of public record, as well as inform creditors of the old company. Your liquidator will handle this for you, including the fair valuation.
(2) Applying to Court– You can also petition the court for permission to reuse a company name, assuming it is within 7 days of liquidating the old company. Your insolvency practitioner will be able to advise on the due process for this. Once applied, the court will give you answer within 6 weeks of application.
What are the Main Considerations when Liquidating a Company and Starting Again
Below we list the main points you should consider when voluntarily liquidating a limited Company and starting again:
HMRC may Insist on a Security Deposit
If the old company owed HMRC significant tax debts. HMRC may ask for a deposit or security bond from you when setting up a new company. This gives them a measure of protection against perceived risks, given that you’ve defaulted before. The amount requested is calculated on a case by case basis and will be dependent, at least in part, on the amount that was owed them previously.
Sale of Assets at Correct Value
When goods are sold from company A to company B (‘newco’), the key factor is that they’re done at fair market value. An independent valuer must be used and the overall process must be run by a licensed insolvency practitioner.
This kind of process is actually very common (football clubs, for example) and as long as due process is followed it can be a succesful way of allowing job retention, and the avoidance of receivership or bankruptcy.
Personal Guarantees Remain
Where directors or shareholders hold personal guarantees, liquidating the company will not offer a solution. Personal guarantee documents are between an individual and a finance provider and they are highly enforceable. This is one of the most common issue we deal with when advising directors about liquidation.
A liquidator has a duty to ensure the best return for creditors and, as a part of the liquidation process, must investigate the company directors. Where finance has been personally guaranteed, there is no way to avoid the director having to repay his personally.
TUPE does not apply in Liquidation
A set of laws known as TUPE (Transfer of Undertakings (Protection of Employment) Regulations 2006) are designed to protect employees in the even of a corporate sale, maintaining employment contracts under existing terms and conditions. In the case of either compulsory or voluntary liquidation ,however, TUPE does not apply, meaning contracts can be renegotiated or terminated.
Limited Credit Accounts with Suppliers
You should expect to have more difficult setting up terms of credit with suppliers in your Newco, without sufficient security being in place. They may also insist on more stringent terms while you build up a better credit score over time.
We always include primary sources with our work, as referenced by our licensed insolvency practitioners when writing the article.
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Insolvency Act Section 216 – https://www.legislation.gov.uk/ukpga/1986/45/section/216
Phoenix companies and the role of the Insolvency Service – https://www.gov.uk/government/publications/phoenix-companies-and-the-role-of-the-insolvency-service/phoenix-companies-and-the-role-of-the-insolvency-service
Re-Use of Company Names – https://www.gov.uk/government/publications/re-use-of-company-names
Business Transfers, Takeovers and TUPE – https://www.gov.uk/transfers-takeovers
HMRC Security Deposits: https://www.gov.uk/guidance/tax-deposits-and-bonds-employers-and-traders#:~:text=HMRC%20may%20ask%20for%20a,value%20items%20as%20a%20deposit.