When a company with debts is liquidated and closes down, any assets are sold to repay creditors as far as possible. But what happens to an insolvent company that has no assets to sell? Can you close a company with debts and no assets?
Creditors’ Voluntary Liquidation (CVL) is a formal process used to close down insolvent companies. If you enter CVL you can prioritise creditor interests, so in this respect it helps you fulfil your legal obligations as a director.
But because it’s an official procedure it requires the appointment of a licensed insolvency practitioner (IP), which means professional fees become due. This might appear to rule it out as an option considering the business’ financial position, but there may be a way to close your company using CVL even though it has debts and no assets.
Directors of insolvent companies can voluntarily place their company into liquidation – trading ceases so creditor losses don’t increase, and a licensed IP is appointed to administer the CVL.
Secured creditors can repossess the asset against which their loan was taken out, and if any assets remain they are valued and sold at auction to raise money for the liquidator’s fees and other creditors.
Any debts remaining at the end of the process have to be written off, and it’s often the case that unsecured creditors receive little or no return from insolvent liquidation, especially when the company concerned has no assets to sell.
The fact that there are no assets doesn’t mean this process can’t be followed, as you may be able to pay the fees by claiming redundancy pay as a director. If you’ve worked as an employee of the company under a contract of employment, you could be eligible to claim.
The average claim for director redundancy in the UK stands at £9,000, so it would be worthwhile finding out if you could make a claim, and then you could use the money to pay for liquidation.
A further concern if you have provided a personal guarantee for company borrowing is repaying the lender any outstanding amounts. Creditors, such as banks and other large financial institutions, commonly demand a guarantee from directors before they sanction a loan.
When loans are taken out, the possibility of a guarantee being called in can seem remote. It’s also often the case that businesses can’t access borrowing without the provision of a personal guarantee.
This makes claiming director redundancy even more important if you’re eligible. You may be able to use a payout to fund a CVL and/or fulfil your personal guarantee on an outstanding business loan.
If you’re not eligible to claim redundancy pay as a director, you may be forced to wait until a creditor petitions to wind up your company. This would force you into compulsory liquidation, which isn’t the best option even though it doesn’t involve paying professional fees.
When a company enters compulsory redundancy the conduct of directors leading up to insolvency is scrutinised by the liquidator for evidence of misconduct, or activity that could have led to the company’s downfall.
If you would like more information about closing a company with debts but no assets to sell, please contact our partner-led team at UK Liquidators. We are liquidation specialists with over 25 years’ experience, and can provide the reliable guidance you need. Operating from offices around the country, we can quickly provide assistance via a free same-day consultation.
If you are considering liquidation for your limited company, taking advice from a licensed insolvency practitioner can help you understand your options.
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