The impact on the creditors, particularly your unsecured creditors, is likely to be far greater when closing a company that cannot afford to pay all its debts. As the director of an insolvent company, you must take steps to protect your creditors from further financial loss. You can do that by seeking advice from a licensed insolvency practitioner immediately. They may advise that it’s in the best interests of your creditors to cease trading and close the company down.
There are two ways to close an insolvent company:
Creditors’ Voluntary Liquidation (CVL)
Creditors’ Voluntary Liquidation is a process you initiate yourself. You will appoint a licensed insolvency practitioner to act as the liquidator. They will communicate with your creditors and sell the company’s assets for their benefit. They will use the money they raise to repay your creditors in the statutory order. Broadly speaking, that order is:
- Secured creditors can seize and sell company assets to recoup their losses.
- Preferential creditors include company employees with outstanding wages and holiday pay, and HMRC for unpaid VAT and PAYE.
- Unsecured creditors are suppliers, landlords, customers and other creditors that do not hold company assets as security.
When it comes to repaying the unsecured creditors, it’s often the case that there’s very little money from the sale of assets left. That means they can receive a small proportion of the money they are owed or even nothing at all.
Any debts that remain after all the funds are distributed will be written off and the liquidator will close the company down. In this case, your unsecured creditors will be left out of pocket. The exception here is if you have signed a personal guarantee, in which case, the creditor can pursue you personally for the repayment.
If a creditor is unsuccessful in collecting a debt, they can take action that can eventually force your company into liquidation. As a company director, waiting for a creditor to force you into liquidation is not advisable as it can expose you to accusations of wrongful trading and other forms of misconduct.
In Compulsory Liquidation, it’s the court that appoints the liquidator. Similar to a Creditors’ Voluntary Liquidation, their role is to take control of the business and sell its assets for the benefit of its creditors. The creditors are repaid in a strict order and any remaining debts will be written off.