Closing a company with debts and no assets is possible. The most common way is for the Directors to personally pay for a Creditors Voluntary Liquidation. However, if they are unable to do so they may need to wait for the creditors to wind up the company and issue a winding-up petition for it to be placed into Compulsory Liquidation.
If a company is insolvent then the procedures that can be deployed to wind up a company are limited. It is not possible to use the Members Voluntary Liquidation procedure to do so as that is reserved only for the winding up of a solvent company.
For more detailed information on how to close a business please visit our main How To Close A Limited Company page.
Closing A Company With No Assets
Creditors Voluntary Liquidation is the most common procedure used by Directors to close a company with debts and no assets.
It is an insolvency procedure that is legally approved under the Insolvency Act 1986 which enables a company to be wound up in an orderly manner by a Liquidator. The company is in effect handed over by the Directors to the Liquidator who realises the assets and after the costs of Liquidation are taken into account, any surplus is distributed to creditors.
In the case of a company being closed with no assets, there is likely to be less for the Insolvency Practitioner to do when they are appointed as the Liquidator meaning the professional fees may be more affordable. However, to place the company into Creditors Voluntary Liquidation (“CVL”) the Insolvency Practitioner who has advised the Directors will still need to have their fees paid.
To go into CVL the shareholders will need to vote on a winding up resolution that is passed by 75% or more of the shareholders entitled to vote.
Director Redundancy Claims To Pay For Closing A Company With No Assets
When a company has no assets and there is no source of finance available from the Directors to pay for the fees of the Insolvency Practitioner, it might be possible for the redundancy claim of the Directors to provide the necessary funds.
As an employee of the company Directors can make an employee claim against the Redundancy Payments Service. However, that position is subject to the position of a Director being:
- A payrolled employee
- Having an employment contract
However, when a company is insolvent many Directors are no longer paid a salary to give the company a cash flow breathing space so it does not incur extra debts to HMRC in respect of PAYE and National Insurance it cannot afford.
Nevertheless, if a Director continues to work for a company but is no longer listed on the payroll they are no longer considered to be an employee and will be unable to lodge an employee and redundancy claim. If a Director does not pay themselves minimum wage for example in the build up to insolvency then they will typically no longer be considered to be an employee with the claim being rejected.
Creditors Closing A Company With Debts And No Assets
If the costs of a CVL cannot be paid because a Director has insufficient funds or they would not qualify for an employee claim a creditor may force the company into Compulsory Liquidation by issuing a winding-up petition to close the company with debts and no assets.
If the Court accepts the creditor is owed money and the company is unable to pay then it will typically agree to make a winding-up order for the company to be placed into Compulsory Liquidation.
Compulsory Liquidation has many similarities to a CVL. In common with a CVL, the ultimate goal of the Liquidator (who is often a government official called the Official Receiver) is to realise the assets to distribute them net of costs to creditors. There are however some differences because it is a process that is started through an unhappy creditor’s court action, not usually being initiated by the company itself.
This process could introduce the risk for the Directors of misfeasance or wrongful trading suggestions if the company does not take steps to stop trading at the appropriate time. This may have personal liability implications for Directors if misconduct or loss has arisen as a result.
To protect themselves Directors can cease trading and still await creditors taking winding up action but there are still company compliance matters which would need to be undertaken such as filing documents at Companies like the annual accounts and Confirmation Statement, along with tax returns with HMRC.
Can You Let Companies House Strike Off The Company With No Assets Instead?
If a Director does not ensure that compliance such as filing accounts and the Confirmation Statement is undertaken then Companies House will take steps to strike off the company known as the First Gazette Notice for compulsory strike off.
Whilst this may have the effect of closing a company with debts and no assets, it is an unsuitable procedure to rely upon because failure to file accounts and a Confirmation Statement at Companies House on time is a criminal offence.
