Closing a limited company is not an easy decision to make; however, if you’ve decided it’s the right move for you, then you must understand how your financial position will affect your options.
If your company is insolvent, meaning it has more debts than the value of its assets, then the process of closing it will be different than if it was solvent.
In this guide, Clarke Bell explains how to close an insolvent limited company to help every director get on the right track.
Can I close a limited company with debts?
Directors will be relieved to learn that it is possible to close a company with debts.
However, it’s important to remember that a company with debts can’t simply be dissolved, which is the legal process of closing a company. It has assets and liabilities that need to be dealt with first.
A company can only be dissolved if it hasn’t traded, sold stock, changed its name, been threatened with liquidation, or had agreements in place to repay creditors within the last 3 months. Therefore, dissolution is not a way to close a company with debts.
In recent times, new measures have been put in place in the Insolvency Service to ensure that directors aren’t taking advantage of the dissolution system as a way to close a company and get rid of its debts. If the Insolvency Service thinks you have acted inappropriately, they now have additional powers allowing them to investigate the director of a company post-dissolution.
If a director is found to have taken advantage of the dissolution procedure, then HMRC has the right to overturn the dissolution of the company if it owes them money.
So, how do you close a company with debts?
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Option 1: Creditors’ Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation is a process through which an insolvent company is liquidated and then dissolved.
Through this process, creditors are properly repaid what they are owed. Meaning the director is meeting their obligations to creditors by acting to pay off their debts. Once the company’s debts have been settled, the company can then be formally dissolved and struck off the Companies House Register.
This is a voluntary procedure that the company directors and shareholders initiate. This makes a CVL a good option for a director of a company in debt who wants to take steps to stop the situation from getting worse and to avoid compulsory liquidation. To find out more about voluntary liquidation and how it works, check out our handy guide.
Why choose Creditors’ Voluntary Liquidation?
As we have already mentioned, a CVL is a way to close down a limited company with debts before the situation deteriorates further.
So, if your company is facing any of the following, it might be time to consider Creditors’ Voluntary Liquidation:
- It can’t afford to pay its ongoing bills
- It can’t afford to pay its outstanding debts
- It has cash flow problems (this does not mean it is not profitable)
- It is no longer sustainable or viable going forward
- It is being threatened with action by creditors who are owed money
By acting quickly and putting your company through CVL, directors can help protect their reputation. Show they are working to address the situation, avoid being forced into liquidation, which has negative consequences and leaves more options open for themselves in the future.
However, another way a limited company with debts can be closed is through compulsory liquidation.
Option 2: Compulsory Liquidation
Unlike with Creditors’ Voluntary Liquidation, which is a voluntary way to close a limited company with debts, compulsory liquidation is when a company is forced to close.
This is often caused by a creditor who successfully petitions the court for a winding-up order. Any creditors who are owed £750 or more by a company and have had several repayment demands ignored can take this legal route.
A winding-up petition, if successful, can force the company to close. In this case, all the company’s assets will be sold to pay back its debts.
Finally, the company will be taken off the Companies House Register following a 2-3 month period.
Just as it sounds, compulsory liquidation is serious and can have a range of negative consequences for the director.
Compulsory liquidation can often reflect badly on the company director. After all, it shows that they have not taken their legal duties as a director seriously and haven’t acted to repay creditors’ money owed by the company.
What’s more, professional bodies like accountants and banks as well as customers and suppliers will often take a dim view on a director that has let their company fall into compulsory liquidation.
It can also limit what options are open to the director in the future. So, as you can see, there is a range of negative impacts that compulsory liquidation can have.
Close your limited company with the help of Clarke Bell
If you are looking to close a limited company with debts in 2021, Clarke Bell is here to help.
Now you know what options are open to you, it’s time to engage the services of a licensed Insolvency Practitioner to help kick start the process. That’s where Clarke Bell comes into play.
We have a team of friendly experts with over 28 years’ experience under our belts. Meaning we can help to close your limited company whatever the circumstance.
We work closely with directors every step of the way to make sure we get the best possible outcome. To see how we can help you, why not get in touch today?