reviewed-by
Reviewed by
Chris Andersen
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Reviewed by Chris Andersen

Chris became an Insolvency Practitioner in 2014 and is currently regulated by the IPA.

He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

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28th November 2022

When a limited company cannot pay its debts it enters a state of insolvency.

In this article we’ll explore what this means, addressing where the responsibilities of directors lie during this critical period, and offering practical advice.

Contents
  1. What To Do If Your Company Cannot Pay its Debts
  2. Closing a Limited Company with Debts to HMRC
    1. What if we Have VAT Debts?
    2. Are Directors Liable for Debt in a Limited Company?
    3. What are the Likely Consequences of Your Company Not Paying its Debts?
    4. What Can Bailiffs Take from a Limited Company with Debts?

What To Do If Your Company Cannot Pay its Debts

Here are the practical steps we recommend you take if you find yourself in this situation.

  • Check in with your accountant and put together an accurate asset and liability sheet outlining your position
  • Use our simple insolvency test tool (takes 2 minutes here) if you would like to streamline the process
  • Educate yourself about your situation including a directors legal responsibilities in insolvency
  • Take professional advice immediately. Take care not to favour any particular creditors, as your primary duty, if you are insolvent, is to all creditors and you musn’t show preference

Closing a Limited Company with Debts to HMRC

HMRC is, unsurprisingly, the UK’s largest creditor. If your debts are to them you have a few options

(a) Negotiate a Time to Pay Arrangement. During COVID-19 HMRC are being especially permissive with these, allowing debts of up to 30k to be repaid by monthly instalments over a generous timeframe.

(b) Propose a Company Voluntary Arrangement – This is a structured repayment plan with creditors for a percentage of the total debt. It must be proposed by a licensed insolvency practitioner and voted upon by 75% of creditors for it to pass. HMRC are open to these in some cases, if they feel it’s their best chance to recoup some of their money.

(c) Consider Voluntary Liquidation – HMRC are the country’s largest issuer of Winding Up Petitions, final demand letters which force a company into court for non payment of debts. If you receive one of these you may be forced into compulsory liquidation which a worse situation to be in that choosing to liquidate voluntarily – a process which offers directors more control.

What if we Have VAT Debts?

HMRC are less forgiving when it comes to VAT debts that probably any other form of tax arrears, since this is money which never really belongs to a company but it collects for the Government on their behalf.

HMRC are quick to send threatening letters, including Winding up Petitions, for significant VAT arrears, especially where the directors appear uncommunicative and bury their head in the sand.

If your company has serious VAT debt, it’s wise to tackle this head on. Keep in regular communication with HMRC, explore finance where possible, and check in a with a firm like ourselves if your position appears to be intractable.

Are Directors Liable for Debt in a Limited Company?

In most cases the limited company structure is there to protect directors from personal liability.

Where a company has gone bust, directors should not expect fallout into their personal finances unless there is evidence of what is called ‘misfeasance,’ or directorial wrongdoing.

The classic examples of this are wrongful or fraudulent trading, which are situations where directors have ‘willfully’ or ‘knowingly’ placed interests other than creditors first after becoming aware of the company’s financial position.

A second instance where directors would become personally liable is where personal guarantees have been signed, typically a family house. Financial institutions, such as banks, that hold a registered charge on a house may ultimately seek an Order for sale of the house if the debt is not paid.

This is why it’s always wise to sign personal guarantee documents with extreme caution, or perhaps avail yourself of personal guarantee insurance at the time of signing.

What are the Likely Consequences of Your Company Not Paying its Debts?

  • You will receive threatening letters from your creditors
  • Your corporate credit score will be affected
  • The company reputation will suffer
  • At a certain point, creditors will start to issue final demand letters, such as Statutory Demands or Winding up Petitions
  • Following receipt of a Winding up Petition, a company has just 7 days to pay its debts before a Court Hearing which can force it into immediate liquidation.

What Can Bailiffs Take from a Limited Company with Debts?

Bailiffs must give you 7 days notice before turning up at your place of work, unless they have obtained a Court Order specifying otherwise.

They can never force entry and remove objects, unless they’ve entered before and drawn up a specific list of objects they are going to take on a subsequent visit.

Bailiffs can only take items which belong to the limited company, and not personal items which belong to employees. Generally this means things like equipment, stock, machinery or possibly cash.