What’s the process and are you personally liable for the debts?
One of the benefits of running a private limited company (LTD) or limited liability partnership (LLP) is that you can close the company and not become personally liable for its debts. As a company director, you can initiate a Creditors’ Voluntary Liquidation (CVL) to close the business. Creditors (parties you owe money to) will be repaid as much as possible and any remaining debts will be written off.
What are your options if your business is struggling financially?
If your company is in financial difficulty and you’re under intense pressure from your creditors, you might feel that your only option is to close it down. However, if you believe your business is still viable, there are other avenues to explore.
- If you have tax debts you cannot pay, you may be able to negotiate a Time to Pay (TTP) arrangement with HMRC. That will allow you to continue trading and repay what you owe over a typical period of up to 12 months.
- If you have cash flow problems, alternative funding such as invoice finance or a merchant cash advance could provide a quick cash injection.
- A Company Voluntary Arrangement (CVA) is a formal agreement with your creditors to repay all or a proportion of your debts over time. It freezes interest and charges on your debts and you make a monthly payment towards them while you continue to trade.
That’s just an example of some of the options available to you. The point is that just because your company is struggling with debt, it’s not necessarily beyond rescue. Before closing your company, you should contact a business debt expert to discuss whether your company can be saved.
How do I close a company with debts?
If your company can repay its debts before you close it down, the Voluntary Dissolution procedure, also known as Company Strike Off, is the easiest way to do it. You can apply to Companies House online to dissolve the business, and as long as you meet all the requirements, your business will be struck off the Companies House register after around three months.
If your company cannot pay its debts before closing, it’s insolvent. There are two routes into liquidation for an insolvent company. You can close the company voluntarily by entering into a Creditors’ Voluntary Liquidation or wait for a creditor to force you into Compulsory Liquidation.
Creditors’ Voluntary Liquidation
You can put your company into a CVL by ceasing trading and appointing a licensed insolvency practitioner to act as the liquidator. They will take charge of the company, deal with the employees and invite creditors to make claims for the money they are owed. They will then sell the business’s assets and use the money raised to repay the creditors as much as possible. They will also file the relevant reports with government agencies before closing the company.
The benefit of closing the company voluntarily is that it shows you are serious about meeting your legal duties as a company director and acting in the best interests of your creditors. That reduces the risk of allegations of misconduct and wrongful trading, which could lead to negative consequences for you personally. You could also be eligible to claim director’s redundancy pay.
Compulsory Liquidation
Compulsory Liquidation is another way to close a company with debts, but it comes with greater risks than a CVL. Rather than liquidating the company voluntarily, you wait to be forced into liquidation by a creditor who has obtained a court order against you. A creditor, most commonly HMRC, will see this as a last resort after making multiple failed attempts to recover the debt.
This approach can lead to a less favourable outcome for all parties, including you as a company director. The liquidator will investigate the reasons for the company’s failure and your conduct leading up to the insolvency. If the liquidator finds evidence of misconduct, wrongful trading or fraudulent trading, you could be made personally liable for some or all of the company’s debts. You may even be disqualified from acting as a director in the future.
Will I have to repay company debts personally?
When you liquidate a limited company with debts, the debts that the business cannot repay are wiped out as part of the process. However, there are some exceptions. If you have signed a personal guarantee for company borrowing that the business cannot repay, the creditor can pursue you personally for the debt.
You can also be made personally liable for company debts if you have not acted properly when running the business. That’s why it’s so important to act swiftly if your company is in debt and to seek professional advice.
How can we help?
If your business has unmanageable debts, we can help you understand your options and close the company in a way that protects the interests of your creditors and you as a company director. Contact our business debt experts today for a free consultation.
