There are three ways to close a company with debts. A company with debts can be closed by Creditors Voluntary Liquidation, Compulsory Liquidation or Companies House Strike Off.
The option chosen depends on who is seeking to close down the company and the nature of the procedure sought. Directors who wish to close a company with debts need to take account of their Creditor Duty and directors’ duties when deciding which method to use.
Both of the liquidation options are procedures that involve the appointment of a liquidator to wind up the company. The Companies House Strike Off procedure does not require the appointment of a liquidator but strict rules that must be followed to use that process.
For more information on your options for closing a business please visit our main How To Close A Limited Company page.
Who Are The Company’s Debts Owed To?
Before considering the procedures available to close a company with debts it is important to consider to whom the debts are owed.
Can HMRC Close My Company Due To Tax Debts?
In particular, if a company owes substantial debts to HMRC then as one of the most aggressive of creditors owed money in the vast majority of liquidations HMRC can close companies down. Although HMRC’s processes may assist companies, such as time to pay arrangements it forces more companies into Compulsory Liquidation than any other creditor.
There are two ways to avoid going into Compulsory Liquidation due to HMRC tax debts:
- Pay off the HMRC tax debts.
- Opt for Creditors Voluntary Liquidation.
Creditors Voluntary Liquidation To Close A Company With Debts
Creditors Voluntary Liquidation is perhaps the most appropriate method to close a company with debts.
It is a formal legal procedure permitted under the Insolvency Act 1986. It is a process that may enable the writing off of up to all of the company’s debts; it does not involve the writing off of its assets. The liquidator is required to realise the assets for the best possible price to to maximise the potential returns that can be made available for creditors after the costs of the liquidation process.
How To Start A Creditors Voluntary Liquidation
To start a Creditors Voluntary Liquidation (“CVL”) to close a company with debts the directors need to pass a Board Resolution to agree for the company to be wound up and placed into CVL.
Once the Board has approved the CVL the Directors need to ask the shareholders to pass the winding up resolution. A report known as the SIP 6 Creditors Report is usually prepared for the directors by the Insolvency Practitioner they have chosen to be the liquidator to close and winding up the company. It is a report to explain to creditors why the company is going into liquidation and provide financial information. In addition, the Directors are required to provide and have filed at Companies House the Statement of Affairs setting out the assets and liabilities in some detail.
The final part of closing a company with debts through CVL is for the creditors to vote on the appointment of the liquidator. They may endorse the liquidator put forward by the directors or look to appoint someone else.
Unlike a CVL a Compulsory Liquidation may expose directors to the suggestion that they have not been responsible and proactive in attending to the company closure, causing creditors to run up further costs in winding up the company. Whilst directors have no control of a company once it has gone into liquidation many directors opt for CVL because they are dealing with a liquidator they know, having usually built up a relationship with them in the period before the company formally goes into liquidation.
Who Can Make Use Of A CVL To Close A Company With Debts?
Only a company’s directors (or shareholders) can start a CVL to close a company with debts.
It is not open to creditors to initiate a CVL because the Articles of Association of a company make no provision for creditors to have any powers to put a company resolution to the shareholders. This can only be done by the directors or the shareholders. However, the creditors can still appoint a liquidator of their choice instead.
In practice, for many companies, the directors and the shareholders are the same people who will progress the CVL process.
Compulsory Liquidation To Close A Company With Debts
Compulsory Liquidation is a procedure from Chapter VI of the Insolvency Act 1986 which can be used to close a company with debts.
To start putting a company into Compulsory Liquidation a person known as the petitioner has to petition the court for an order that the company be wound up. This is known as a winding up order.
Upon making a winding up order a government official from the Insolvency Service known as the Official Receiver is initially appointed to act as the liquidator. Whilst there are subtle differences between Compulsory Liquidation and CVL, the role of the liquidator is the same. He or she has to wind up the company by realising the asset to enable a distribution to creditors of surplus funds available after the costs of the liquidation process.
To avoid Compulsory Liquidation directors must act decisively and quickly when considering closing a company with debts otherwise they risk losing total control over the whole process.
Who Can Make Use Of A Compulsory Liquidation To Close A Company With Debts?
All key stakeholders can use Compulsory Liquidation to wind up a company with debts.
Commonly it is by a disgruntled unpaid creditor with debts of £750 or more. Typically as a last roll of the dice to attempt to get paid after exhausting debt collection methods a creditor with an undisputed debt petitions the court to winding up the company.
However, it is not only an independent creditor that has gone unpaid who may look to winding up a company by Compulsory Liquidation. The company’s directors can close the company with debts down using the procedure. It is relatively common for a company’s directors to be owed some money by the company and provided it is £750 or more they can petition as well.
Directors can also petition to put a company into Compulsory Liquidation due to Section 122 of the Insolvency Act 1986 if the company has passed a special resolution by shareholders approving the process.
Companies House Strike Off To Close A Company With Debts
The Companies House Strike Off procedure can be used to close a company with debts and put it into dissolution.
It is generally unsuitable as a procedure to close a company with debts but it is technically possible. Using form DS01 to close a company can be done for a small fee after you have stopped trading for at least three months.
Directors can attempt to strike off a company with debts by filing the DS01 notice at Companies House. Within 7 days all creditors, employees, directors, shareholders and other stakeholders must be provided with it. It is then when a creditor such as HMRC will typically raise an objection to striking off a company. It is at that point when most directors will then consider opting for Creditors Voluntary Liquidation to take steps to close a company with debts.
Even after a company has been struck off a creditor can restore a dissolved company to the register at Companies House. This can lead to ramifications for the directors in respect of unpaid company debts so maintaining proper records during the process is essential.
Who Can Make Use Of Companies House Strike Off To Close A Company With Debts?
Only the directors of a company can use of Companies House Strike off to close a company with debts but this could be something opted for at the direction of the shareholders.
Creditors cannot use this procedure and in any event, would be unlikely to and instead object to it.
What Happens To The Debts When You Close A Company?
Company debts after the closure of a company will remain with the company because it is a limited liability company.
Creditors can usually only receive any of their debt when the liquidator has realised the assets and if there is a surplus available to make a payment to creditors after the costs of the liquidation.
However, a director who has issued a personal guarantee (“PG”) on the other hand can be called upon to settle company debts secured by the PG.
Walking Away From A Company With Debts?
Can a director walk away from company debts? Yes, you can. However, walking away from a company with debts does not mean a director can walk from PG obligations. It also means that if a director continued to trade beyond the point when there was no prospect of avoiding closing the company they could be personally liable for wrongful trading.
Directors must follow the correct procedures when looking to close a company with debts otherwise they may face misconduct suggestions and the prospect of director disqualification proceedings. Directors’ duties are strict and if a director wishes to close a company with debts and start again they must ensure they acted impeccably.
