How to close a Personal Service Company with debts

If you want to close your Personal Service Company (PSC) but it has debts, it’s important to follow a process called Creditors’ Voluntary Liquidation (CVL). This ensures you fulfil all your legal obligations as a company director, and meet the stringent insolvency requirements in the UK.

Other forms of business closure do exist but they’re either only appropriate for solvent companies, or mean you can’t fulfil your legal obligations as a company director.

• Voluntary strike-off: if you attempt to close down your Personal Service Company via voluntary strike off, and it’s insolvent, you could face investigation by the Insolvency Service
• Members’ Voluntary Liquidation (MVL) is a further closure process, but again, is only available for solvent businesses
• Compulsory liquidation involves waiting for a creditor to take legal action against your company. This isn’t advisable as it means you aren’t placing your creditors’ interests first – a key legal duty as the director of an insolvent company.

So what exactly is Creditors’ Voluntary Liquidation and what does it involve?

Closing down your Personal Service Company with debts

Creditors’ Voluntary Liquidation is an official process that must be administered by a licensed insolvency practitioner (IP). It ensures the company is wound down in an orderly manner, and offers you protection from allegations of wrongful trading.

When a company enters insolvency the directors must cease trading in order to protect company creditors - failing in this duty can leave you at risk of misconduct accusations. A further benefit of CVL is that you have some control over the process in terms of timing and choice of liquidator.

What does Creditors Voluntary Liquidation involve when a PSC has debts?

When your company enters Creditors’ Voluntary Liquidation, the appointed liquidator takes control of the business. All assets are sold, and the proceeds used to repay creditors as far as possible, with remaining debts being written off.

The liquidator prepares a report for creditors to explain the company’s position. Although they also investigate the reasons behind the company’s closure, by proactively placing the company into liquidation you’ve demonstrated your intent to prioritise creditor interests.

The company is struck off the register at Companies House and ceases to exist once all funds have been distributed, and the liquidator has completed their duties. You’re then free to move on to another venture if you wish.

Director redundancy and Creditors’ Voluntary Liquidation

A key benefit of entering Creditors’ Voluntary Liquidation when your company is in unmanageable debt is that you may be able to claim director redundancy. Eligibility criteria for claiming redundancy pay as a director include:

• Working under a contract of employment for your incorporated business for at least two years
• Working for a minimum of 16 hours per week in a practical role
• Receiving a regular salary through PAYE, rather than only dividends
• Being owed money by the company – this could be your initial investment, for example

UK Liquidators can determine whether you’re eligible for redundancy pay and other statutory entitlements. With the average claim for director redundancy being around £9,000, it’s definitely worthwhile investigating.

It’s crucial to understand the procedures for closing down a Personal Service Company, and why you cannot simply strike it off the register if it has debts. If you would like more information and guidance on closing a Personal Service Company with debts, our team of experts can help. We have extensive experience of helping company directors navigate their way through insolvency and liquidation, and can offer you a free, same-day consultation.