Close Company with debts
Author
Shaun Barton | Company Closure Expert
Can I close a limited company with outstanding debts?
It is possible to close a limited company that has outstanding debt, and there are two different options – Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation. Both of these result in your company being permanently struck off the Companies House register.
CVL is a formal route that safeguards company creditors from further financial loss. Compulsory liquidation, on the other hand, is enforced by one or more creditors who petition to wind up the company to recover some of their debts.
When a company with debts closes down, creditors are repaid as far as liquidation funds allow. If you’ve provided any personal guarantees for business borrowing, however, you become personally liable for the amount the company cannot afford to repay.
How does Creditors’ Voluntary Liquidation work?
Creditors’ Voluntary Liquidation is the recommended route for closing a company with debts. As well as protecting creditor interests it safeguards you and other directors from damaging accusations of wrongful trading.
The procedure can be initiated by directors but must be carried out by a licensed insolvency practitioner (IP). The IP’s duties include dealing with claims from creditors, realising company assets, and distributing all the funds from the sale.
Unsecured debts that cannot be repaid are written off, and you’re generally free to enter into other ventures, with some restrictions on the use of the company name. Crucially, you aren’t liable for any business debts unless there are personal guarantees in place or misconduct is uncovered.
CVL vs compulsory liquidation
When a company reaches a point of insolvency, it must cease trading and prioritise creditor interests. If you continue to trade when your business is insolvent, however well-intentioned your motives, you could face allegations of misconduct.
That’s why it’s advisable to voluntarily place the company into liquidation rather than waiting for a creditor to take legal action. The consequences of failing to protect creditors are severe and can include personal liability and director disqualification.
Although compulsory liquidation incurs little financial cost for the business, the cost to you, as a director can be considerable as your actions leading up to insolvency come under intense scrutiny by the insolvency service.
Benefits of CVL for closing a company with debts
Creditors’ Voluntary Liquidation offers important benefits for creditors and directors, including:
Meeting your legal obligations to creditors
Once a company enters insolvency director duties change and the interests of creditors take precedence over those of the business. Fulfilling your legal duties is essential to avoid serious issues such as personal liability.
Director redundancy
If you work for the company under a contract of employment you may be eligible to claim redundancy pay. This could be used to fund the CVL process, repay some of the company’s debts, or support your financial position following the loss of your business.
For more information on closing a limited company with outstanding debts, please get in touch with our expert team. Company Closure offers free consultations and can ensure you take the correct route in closing your company.
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