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Can I close a company with debts?

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Closing a company with debts to outstanding creditors

If your company owes money to one or more creditors it doesn’t prevent you from closing the business down. The main point to consider is whether or not the company’s debts can be repaid, specifically in a timescale of 12 months or less.

If the company can repay its debts in this time period, and the total value of its assets are greater than its liabilities, the company is solvent, and closure typically involves entering a formal process called Members’ Voluntary Liquidation (MVL).

But what happens if the business can’t afford to repay its debts? In this case, rather than waiting for a creditor to enforce liquidation it’s advisable to take the initiative and place the company into Creditors’ Voluntary Liquidation (CVL).

So let’s look at these processes in more detail.

Closing a company with debts that can be repaid

Members’ Voluntary Liquidation

Members’ Voluntary Liquidation is a formal procedure that must be implemented and administered by a licensed insolvency practitioner (IP). The IP oversees the sale of assets, pays the company’s debts, and distributes the remaining funds to its members.

This procedure can be a tax efficient way for you to close down a company with debts that are repayable. Although the company does carry outstanding debt during the process, directors provide a statutory declaration that they can be paid off within 12 months, providing reassurance to creditors and recourse for them to act if the company is later unable to repay.

Reinstatement of a company can sometimes occur if contingent liabilities are not disclosed to the liquidator, or directors are unaware of them – contingent liabilities can include pending employment or product-related claims against the company.

It’s also possible to close a company with debts via dissolution, but it’s imperative to be sure of the business’ solvency before attempting this as it can lead to problems for directors if creditors aren’t repaid.

Closing a company that can’t afford to repay its debts

Creditors’ Voluntary Liquidation offers the opportunity to place the interests of creditors first, whilst also giving you some control over the liquidation process. This contrasts with compulsory liquidation where a creditor files a winding up petition at court, and you have no influence over the ensuing proceedings.

Compulsory liquidation also typically results in stringent investigations into director conduct by the Official Receiver (OR), with a greater risk of being disqualified or held personally liable for the company’s debts.

Creditors’ Voluntary Liquidation is a formal process, and like MVL, requires the appointment of a licensed IP. It’s a common method of closing down a company that has no future - the voluntary aspect of placing it into liquidation allows you to meet your statutory obligations as a director by limiting creditor losses.

The insolvency practitioner sells company assets to generate funds for the creditors, but any unpaid debts remaining are written off unless a personal guarantee is attached. One significant advantage of this process that isn’t commonly known is that you may be eligible for redundancy pay as a director.    

If you’ve worked for the company as an employee as well as being a director, you may be able to claim redundancy pay and other statutory entitlements. Some directors use the money to repay some of the company’s debts, or pay the professional fees involved, so it’s worthwhile investigating this if you enter a CVL.

For more information on closing a company with debts, please contact our expert team at UK Liquidators. We’re insolvency specialists and will provide the professional advice you need – we can offer a free same-day consultation and operate offices around the country.

Shaun Barton
Director
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