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Advice on closing a company with debts
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Closing a company with debts
You can close a company with outstanding debts by using an insolvency process known as a Creditors’ Voluntary Liquidation (CVL). With a CVL the company will be brought to an end and creditors will be repaid as much as is it possible to do so. Debts belonging to the company will be wiped out as part of the process, however, the responsibility for repaying any which have been personally guaranteed will fall to the director who provided the guarantee.
As the director of a company which is failing due to financial difficulties, you may be considering liquidation in order to start up a new business, free from the worry of outstanding debt.
For more information on your options for closing a business, please visit our main Closing a Limited Company page.
Firstly, before committing to liquidating your current company, you should take the time to understand whether its fortunes could be turned around. Just because a company is struggling to repay what it owes, does not mean that the company is beyond rescue. Many companies are able to recover from this position and go on to have successful futures. However, this is only possible if you take action during the early stages of financial distress and put a workable plan in place to help turnaround the company's situation.
If you are experiencing debt problems with your company, you are far from alone. During their lifetime, many businesses will experience some form of financial distress. For some this may take the form of a short-term cash flow issue which is quickly resolved; for others, the situation may require professional help from a corporate insolvency professional such as a licensed insolvency practitioner.
The good news is that there are a range of rescue and recovery options out there which may be able to help your business through its current debt struggles.
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Unfortunately, it is sometimes the case that company’s debt problems will take it beyond the point of rescue. In these instances, it may be the best solution for all concerned to look at ways of closing the company and bringing its affairs to an orderly end by way of a formal liquidation process.
An insolvency practitioner will be appointed to handle the process on behalf of the company; they will liaise with creditors, ensure company debts are repaid as far as possible, before having the company dissolved at Companies House. This is a serious step to take so you should ensure you talk through all of the available options with a licensed insolvency practitioner before committing to a course of action.
There are two routes into liquidation for an insolvent company: Creditors' Voluntary Liquidation (CVL) and Compulsory Liquidation (WUC).
A CVL is a director-initiated process which allows the director of an insolvent business to voluntarily cease trading and appoint a liquidator which must be a licensed insolvency practitioner to liquidate assets. As part of the liquidation process, the insolvency practitioner will liaise with any creditor claims, deal with employees, sell assets, and issue the required reports to government agencies. The funds realised from this will be used to pay for the liquidation process and any remaining funds will be used to pay creditors.
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While the process of Compulsory Liquidation is much the same as a CVL, it differs in that the company is essentially forced to enter liquidation via a winding up court order rather than the directors triggering this process on their own accord. A company can be forced into compulsory liquidation by a disgruntled creditor when all other methods of debt recovery have failed.
Once a company has been liquidated, its directors, unless they have been subject to a disqualification order, are typically free to incorporate another limited company if they so wish.
In the event of liquidating a company with debts and establishing a new company, there are a number of legal requirements and restrictions which need to be taken into consideration. These restrictions are there to prevent company directors starting a new company in order to escape debt and the consequences. A new company which emerges from the liquidation of an old company with the same assets and typically the same directors is known as a phoenix company.
There are legal restrictions for using the same company name, or a similar company name following the liquidation of your old company, and starting a new company.
If the old company was placed into compulsory liquidation, the same name or a similar name cannot be used. Section 216 of the Insolvency Act 1986 states that it is illegal for the director or shadow director of a company, at any time in the period of 12 months before it went into liquidation to be involved in another company which has the same name or a similar name up to five years.
There are three exceptions to reusing a company name in this circumstance.
1) Where the new company acquires the whole, or majority of the whole of the insolvent company, as arranged by an insolvency practitioner acting as the liquidator, administrator or administrative receiver, or a supervisor of a voluntary arrangement.
In order to reuse the name in this circumstance, notice must be given in two forms under rule 4.228:
- A submission must be made to the London Gazette, the official public record, within 28 days of taking on the name and purchasing assets of the predecessor company from the liquidator. The notice must state that you are the director of a new company of the same name, or a similar name
- Each creditor of the previous insolvent company must be informed that you are the director of a new company which is of the same name, or a similar name
2) The second exception under rule 4.229 involves the new company requesting permission from the court, also known as ‘leave’, to reuse the name of the insolvent company. The following two conditions should be taken into consideration:
(a) Court leave must be applied for by no later than 7 days from the date the company went into liquidation
(b) Leave will be granted by the court no later than 6 weeks from this date
3) The third exception, rule 4.230, states that the name of the insolvent company can be used if the following has been met:
(a) The company has been known by that name for the last 12 months before the company went into liquidation
(b) The company must not have been placed into dormancy in the last 12 months
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If HMRC believe that there is a risk that your new company may fail to pay its tax on time, they may request a security deposit, such as a bond or fixed security payment. If you fail to pay your bills to HMRC, they will settle the balance by keeping the security deposit. Property and high value items cannot be used as a security deposit.
It is an act of misfeasance to sell the assets of the company at a price lower than their market value once the business is known to be insolvent. This is known as a Transaction at Undervalue, and the appointed insolvency practitioner is duty bound to investigate transactions of this nature as per CDDA requirements.
TUPE, Transfer of undertakings (protection of employment) regulation does not apply to employees transferring from the old company to the new company in the event of a compulsory liquidation or CVL. As a result, contract terms, working hours and other benefits can be changed without this being treated as unfair.
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A limited company is a separate legal entity so you will not be personally liable for company debts. This operating structure is known as limited liability.
However, if you have signed a personal guarantee for any company borrowing, you will be personally held liable for repaying this should the business not be able to. Furthermore, if you have an overdrawn director’s loan, the liquidator may pursue you to repay this.
Due to poor credit history and bad relationships with creditors, they may be hesitant to provide the new company with a credit account without extra security in place, such as tighter terms or an advance payment.
If liquidating your business and starting afresh is the best possible option for your business, your next step is to appoint an insolvency practitioner. Once the commercial debt has been written off, you can focus on building a new business, taking into account previous lessons learnt from operating your old business.
If you would like to speak to a Real Business Rescue expert about the liquidation of your company, call one of our licensed insolvency practitioners. We can arrange a free same-day consultation at a nationwide network of UK offices across the country.
Further Reading on Can I close a company with debts and start again?
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