A Guide to Closing a Limited Company with Debts

By June 28, 2022Tips & Advice
A Guide to Closing a Limited Company with Debts

To close down a limited company with no debts or assets, providing it hasn’t traded for three months, the process is as simple as striking it off at Companies House. However, when closing a limited company with debts, there is a set process that must be adhered to.

Closing down a business with debt involves using the creditors’ voluntary liquidation (CVL) process. This must be carried out in conjunction with a Licensed Insolvency Practitioner.

A CVL ensures that the creditors receive the maximum possible return. Once all the debts have been paid from whatever funds are available, any remaining debt is automatically written off.

What is the process of closing a limited company with debts?

The Insolvency Practitioner will deal with the company’s creditors; advertise the decision to liquidate the business in the London Gazette; sell any assets and distribute the processed to the creditors in strict order of priority, and finally, strike the company off from the Companies House register.

Who is liable for limited company debts?

All insolvency processes, including a Creditors’ Voluntary Liquidation, will require the Insolvency Practitioner to investigate the actions of the company directors during the period leading up to the insolvency.

The practitioner will want to see evidence that the directors acted in the best interests of creditors at all times.

A limited company provides protection for directors against becoming personally liable for company debts in the event of liquidation. Providing there is no evidence of misfeasance, where a director misapplies, misappropriates, retains or becomes accountable for any money or other property of the company, the directors will not have any personal liability for the company’s debts.

However, if evidence of misfeasance is found, or there are signs that the directors have placed their own interests over those of their creditors when they were aware of the company’s financial position, then personal liability for the company’s debts may become an issue. An example would be if a director prioritised paying their own salary over settling creditor debts.

During the insolvency process, the appointed Insolvency Practitioner will look at a number of factors, including the directors’ loan accounts and salary and dividend payments; the reason for the company’s demise; whether everything has been done by the book; and whether any advice provided by professionals such as accountants and lawyers was followed.

If failings are identified, or the directors are found to be at fault for the demise of the company, then they may face further action, with the liquidator possibly seeking repayment from the directors.

Depending on the degree of culpability, the liquidator may enforce director disqualification proceedings.

Are all debts written off when closing a limited company using a CVL?

At the point of insolvency, anyone to whom the company owes money will become a creditor. There is a strict order of priority in which debts will be paid from any available funds.

HMRC is classed as a preferential creditor, meaning they are at the top of the list to be paid. Next on the list is anyone with security over an asset.

A Creditors’ Voluntary Liquidation writes off all debts that cannot be paid, including anything owing to HMRC such as unpaid VAT.

Looking for help closing a limited company with debts?

As licensed insolvency practitioners, Insolvency Online has the expertise to provide a number of strategic solutions for insolvent companies.

Our experts, acting as official appointed liquidator, will take care of providing creditors with the necessary information, as well as assisting directors in preparing the required documentation to ensure full compliance with the Insolvency Act and Rules.

To learn more about how Insolvency Online can assist you, you are welcome to get in touch.

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