If your company has debts and is insolvent, you will need to know what your options are.
For many, it might be the case that the business is no longer sustainable and can’t be rescued. Meaning you will need to know how to correctly close a limited company with debts. After all, the process can be complex. It’s important that directors know what is required of them to ensure the process runs smoothly.
To help, in this guide Clarke Bell explains how to close a limited company with debts, so you know the best way forward.
How to close a limited company with debts
The good news for directors of insolvent companies is that it is possible to close the company.
However, as the company has debts and liabilities that have to be correctly dealt with, the company can’t be dissolved. Which is the legal process of closing a company.
This is because a company can only be dissolved if, within the last three months, it has not:
- Sold stock
- Changed its name
- Been threatened with liquidation
- Had agreements in place to repay creditors (such as a Company Voluntary Arrangement)
As a company with debts can’t be dissolved, it has to follow a different procedure – liquidation.
There are two types of insolvent liquidation that a company can enter into.
Next, we will look at the different types of liquidation and how they can be used to close a company with debts.
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Creditors’ Voluntary Liquidation (CVL)
The first way to close a company with debts is through Creditors’ Voluntary Liquidation (CVL).
This is a process that is entered into when the director has decided to close the company because it has debts it can’t repay.
As the name suggests, this is a voluntary process and is only carried out when initiated by the director. The director will propose a CVL, and it needs 75% of shareholders to agree to pass the required resolution to voluntarily wind up.
Although the outcome of a CVL means that the company is liquidated and then dissolved, meaning it ceases to exist. This is a good way for a director to close their limited company with debts.
After all, by entering into a CVL, the director is showing that they are recognising their duty as a director towards creditors by taking the correct course of action to repay them what they owe.
This allows directors to protect their reputations. It will also mean that if the director wants to open another company in the future, then this option remains open to them.
There are several steps involved in the process.
At the first signs of financial trouble, the director should contact their accountant and a firm of licensed Insolvency Practitioners, such as Clarke Bell. This will ensure that you will be shown how to do everything in the correct and legal manner.
The Insolvency Practitioner who you choose to work with will then collect the correct information required. Which includes copies of your accounts and a list of creditors to whom you owe money.
The company will need to stop trading before the liquidation process can begin. The directors will have to hold a meeting where it is declared that the company is insolvent and will stop trading.
The next step is to have a members’ meeting which is done with the Insolvency Practitioner. After this, the company has formally started the liquidation process.
That is how Creditors’ Voluntary Liquidation works, next we will look at the other option – compulsory liquidation.
The other way to close a limited company with debts is through compulsory liquidation.
However, unlike with Creditors’ Voluntary Liquidation, which is a voluntary procedure, compulsory liquidation occurs when a company is forced to close because it hasn’t repaid its debts.
Compulsory liquidation is a process that occurs when creditors who are owed money by the company (£750 or more) who have had several repayment demands gone unfulfilled (over 21 days or more) decide to take legal action to retrieve the money they are owed.
To do this, creditors will issue a winding-up petition to the courts. Once this has been reviewed, if this is successful the courts will then issue a winding-up order to the company which puts it into compulsory liquidation.
This means that the company will be forced to go into liquidation. With its assets being sold to raise money to pay back creditors.
Once the liquidation process has been completed, the company will be dissolved and taken off the Companies House Register meaning it will cease to exist as a legal entity.
Compulsory liquidation is a serious procedure, and therefore directors should avoid being forced to liquidate where possible.
After all, this is a process that reflects badly on the company director. Showing that they haven’t fulfilled their legal duties as a director and haven’t taken the right steps to repaying creditors money the company owes them.
For this reason, bodies and organisations including everyone from banks to customers will often have a negative view of a director who has let their company go into compulsory liquidation.
The director of a company that has been entered into liquidation will be investigated by the Insolvency Practitioner to check that things have been done correctly. If the director is found guilty of wrongful or fraudulent trading, they can be disqualified from being a director for up to 15 years.
Let Clarke Bell help you close your limited company with debts
If you are considering closing an insolvent limited company, Clarke Bell can help you. We will look closely at your situation to advise on the best way forward for you.
At the first signs of financial trouble, it is important that you speak to an Insolvency Practitioner who you can trust. Clarke Bell has over 28 years’ experience of corporate insolvency, so you know we will get the best outcome possible.
To see how we can help you, simply get in touch with one of our friendly professionals today.