If your company cannot afford to pay its bills, it is insolvent. Depending on your particular situation, you can close a limited company with debts by putting it into administration, arranging a creditors’ voluntary liquidation, or making an application to the court for compulsory liquidation.
Whichever route you take, you are legally required to put the interests of your company’s creditors before those of its shareholders and directors. If you are unsure which option is best, you should seek professional guidance from a business debt advisor, a solicitor, or an insolvency practitioner as soon as possible.
Whilst company insolvency is an unfortunate situation, your personal assets as a director and shareholder are protected by limited liability. Unless, that is, you provided a personal guarantee for any company loans, or you are found guilty of any unlawful action that contributed to the company’s demise.
Let’s now take a look at the different ways that you can close a limited company with debts. This information should give you a clearer idea of the options available to you.
Option 1: Put your company into administration
If your limited company is in debt and cannot pay the money that it owes to creditors and other third parties (e.g. employees, commercial landlords, HMRC), you can put your company into administration.
Administration is a formal insolvency procedure whereby a company appoints a licensed insolvency practitioner as administrator to either restructure the business and make it profitable, sell it as a going concern, or close it down.
As soon as they are appointed, the administrator has complete control of the company and everything that it owns. They are in charge from that point on, not the directors.
During the administration procedure, the people and organisations to whom your company owes money cannot take legal action against you or any other director or shareholder. The company is also protected from compulsory liquidation and other legal recourse by creditors.
Administration may be the best option if your company is struggling financially, but still has underlying value. For example, it has a strong brand image, loyal clients, or valuable current and future orders on the books.
In such instances, the administrator may be able to find a way to pay the debts, or negotiate with the creditors and apply for a Company Voluntary Arrangement (CVA) to pay the debts over a fixed period.
However, if the administrator is unable to turn your business into a profitable venture, they will either:
- sell the company as a going concern to another business
- dispose of the company’s assets as part of a creditors’ voluntary liquidation, pay creditors with the proceeds, and then close the company
- close the company if there are no available assets to sell
Whichever decision the administrator makes, you will not be personally responsible for paying the company’s debts, even if its assets are insufficient to cover what it owes to creditors – unless you provided a personal guarantee or are found guilty of any unlawful action.
Option 2: Arrange a creditors’ voluntary liquidation
Arranging a creditors’ voluntary liquidation is another way in which you can close a limited company with debts.
If the business is insolvent and you have no way of settling the outstanding payments, the directors can propose that the company stops trading and then ask the shareholders to agree to liquidation (winding up).
To approve a creditors’ voluntary liquidation, the shareholders must pass a special resolution at a general meeting. At least 75% (by value of shares) of the shareholders must vote in favour of the motion for the resolution to pass.
Once approved, you will need to appoint a licensed insolvency practitioner as a liquidator. They will take control of the business and manage the entire liquidation process, which includes:
- settling any outstanding contracts or legal disputes
- selling the company’s assets and using the proceeds to pay creditors
- making all necessary company filings and notifying the relevant authorities (e.g. Companies House, HMRC)
- paying liquidation costs and the final tax bills
- updating all creditors and involving them in decisions, where necessary
- making payments to creditors
- interviewing the directors and reporting on what went wrong in the company
- getting the company removed from the Companies House register
Throughout the entire process, the liquidator acts in the interests of the company’s creditors, not the directors or shareholders.
Option 3: Make an application to the court for compulsory liquidation
In certain circumstances, the directors of an insolvent company can ask the court to order the company to cease trading and be wound up. This procedure is known as compulsory liquidation.
You can make an application to the court for compulsory liquidation if you are able to show that:
- your company is unable to pay its debts of £750 or more
- 75% (by value of shares) of the company’s shareholders agree to it
The application for compulsory liquidation is known as a ‘winding-up’ petition.
Creditors can also make a winding-up petition against your company if they are owed £750 or more and can prove that the company is unable to pay them.
Compulsory liquidation can be costly, and involves a lot of paperwork and a court hearing. If the petition is successful, the court will appoint an official receiver to take charge of your company’s liquidation.
If you can pay off your company’s debts
If you are able to pay your company’s debts in full (for example, by selling off business assets or using your own money), you can close the company afterward by making an application for voluntary strike off.
However, you will need to wait three months after ceasing trading, selling assets, and concluding the affairs of the business before applying to strike off (dissolve) the company.
When you are ready to do so, you will need to complete Companies House form DS01. This form must be signed by a majority of the company’s directors.
Be sure to deal with any remaining business assets beforehand, including closing your business bank account – otherwise, anything that is left will automatically go to the Crown.
If your application is successful, Companies House will send you a confirmation letter and publish a notice of the proposed strike off in The Gazette.
Provided that no objections are made by any third party within two months of the publication, your company will be struck off the register. Companies House will then publish a second notice in The Gazette to confirm that your company has been dissolved and no longer exists.
Can I set up a new company after closing an insolvent company?
Unless you are subject to a director disqualification order, you can set up a new company before or after closing an insolvent one.
The company formation process is exactly the same – you will choose a company name, make an application to Companies House, and register with HMRC for Corporation Tax.
However, there are certain restrictions that you may need to consider. These exist to prevent directors from setting up a new company simply to avoid paying debts:
- If your previous company was wound up by a compulsory liquidation procedure, you may be prohibited from using the same company name, or one that is very similar
- If your previous company failed to pay all of its taxes, HMRC may ask you to provide a security deposit
- If your new company buys assets from the old company, a fair price must be paid for the items. The sale must be legitimate, so you cannot dispose of assets at a discounted price below market value – doing so would be fraudulent
Depending on your situation, you may also struggle to access business finance from lenders or get credit accounts with suppliers and service providers.
The last thing you would want to happen is to find yourself in the same situation again, so it would be best to speak to a business advisor or accountant before setting up a new company.
Thanks for reading
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