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Advice on closing a company with debts


Insolvency Practitioner Approved

Closing a company with debts

You can close a company with outstanding debts, and this is formally done using an insolvency process known as a Creditors’ Voluntary Liquidation (CVL). With a CVL the company will be closed and creditors repaid as much as is possible to do. 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.

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Can I close a company with debts and start again?

As the director of a company which is failing due to unmanageable amounts of debt, you may be considering liquidation in order to start a new business, without the worry of outstanding debt, poor reputation and unhealthy relationships with creditors.

You may have tried to rescue your business by seeking alternative finance such as invoice factoring to meet immediate cash liabilities, sourcing investment to raise capital or applying for a bank loan/overdraft. Due to debt levels and low cash flow, this may be difficult to secure as your business poses a higher risk of non-payment.

In the event of liquidating a company with debts and establishing a new company, there are a few restrictions which should be taken into consideration. This is 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 two routes into liquidation for an insolvent company:  Creditor Voluntary Liquidation (CVL) and Compulsory Liquidation.

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Creditors’ Voluntary Liquidation

A CVL allows the director of the business to voluntarily cease trading and appoint a liquidator which is a licensed insolvency practitioner to liquidate assets.

Prior to the liquidation of assets, an analysis of the business will take place, and if the insolvency practitioner concludes that a CVL is the best route, a report will be drafted accordingly. This will then be circulated to all creditors.

The company will typically enter liquidation within 14 days following the circulation of the report. During this period, the insolvency practitioner will deal with any creditor claims, employees, sell appropriate assets and issue the required reports to government agencies. The funds released from this will be used to pay for the liquidation process and any remaining funds will be used to pay off creditors.

The insolvency practitioner will then commence an investigation into the director, ensuring that they have fulfilled their duties, confirming that no wrongful trading has taken place. The remaining debt will then be written off. If this is not the case, the director risks being banned for up to 15 years, a fine, imprisonment or personally being held liable for the company debt.

Compulsory Liquidation

Compulsory Liquidation is different to Creditor Voluntary Liquidation as the company is essentially forced to enter liquidation via a winding up court order.

Reusing Company Name

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

HMRC security deposit

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.

Goods and Assets  

It is fraudulent to sell the assets of the company at a price lower than their market value. As the company is in distress, a quick sale of the assets is needed so this can be carried out at a discounted price. Creditors can argue against this in court so it is important to ensure that the business sale is legitimate.

Transferring Employees

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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Debt Guarantees

A limited company is a separate legal entity so you will not be personally liable for company debts.

This operating structure is protected by limited liability.

As the director, if you have signed a personal guarantee and the company is unable to repay debt, you will be personally held liable. If you have an overdrawn director’s loan, the liquidator may pursue you to repay this.

Limited Credit Accounts

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 network of 100+ UK offices across the country.

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