Closing a company with debt in the UK requires a specific legal process. The legal steps can help the process run smoothly for all those involved financially with the company. In our guide, we'll discuss how to legally close a company that has outstanding debt. As a trusted source for business law advice, we'll talk through:
The legal steps and options for company directors
The process of liquidation
Insolvency law in the UK
The role of creditors during the process
Voluntary liquidation and creditor management
Step 1: Assess the Company’s Financial Situation
The first step is to assess the company’s financial health. A financial review will look at both the assets and liabilities of a company. Assets are those that the company owns or has control over. There are both current and non-current assets:
Current includes any money owed by clients and inventory the company owns
Non-current includes any trademarks or property owned
Liabilities are those debts that are due within the next 12 months. The financial review will also look at the long-term liabilities which include loans and any pensions. This evaluation will help to determine whether the company is solvent and can pay its debts. Or whether the company is insolvent and can’t pay its debts. This will help to determine the financial health of the company and whether they need to go down a liquidation route.
Seek Professional Advice
You should also consult with an insolvency practitioner as early as possible. They can help determine whether voluntary liquidation is necessary. They will assess the company’s financial health and can discuss the company liquidation process. An insolvency practitioner could discuss other routes to go down such as administration which could be more appropriate for the situation. If you're in doubt, you can also speak with a qualified corporate solicitor.
Step 2: Explore Options for Closing the Company
The next steps will vary depending on if the company enters liquidation voluntarily.
Creditors’ Voluntary Liquidation (CVL):
If the company is insolvent and unable to pay its debts, the directors can consider a Creditors’ Voluntary Liquidation. Creditors voluntary liquidation in the UK is a way for the company to wind up the company. When a company goes into voluntary liquidation, they must stop trading immediately. This can help protect creditors and will ensure you are compliant with your duties as director.
A company should appoint an insolvency practitioner or insolvency solicitor to handle the liquidation. They will contact all creditors and inform them of the liquidation. They will also sell any company assets as discovered in the financial report and repay the creditors as much as possible. They follow the process as discussed in the Insolvency Act 1986.
Compulsory Liquidation:
If a company does have debts and does not enter liquidation voluntarily, steps may be taken by creditors. They can petition the court for the company to be placed into compulsory liquidation. The creditors would have to make a statutory demand or court order which would force the directors to act on their debts or start the liquidation process. This would force the assets to be sold and any profits to be paid to creditors.
This process sees an official liquidator appointed to manage the closure. Bank accounts will be frozen while the liquidator assesses the company’s assets and paperwork. The company is then dissolved. This process is a lot more costly and stressful for directors. To avoid a winding-up petition that can lead to compulsory liquidation, you should consider voluntary liquidation.
Step 3: Notify Creditors and Stakeholders
The next step in the liquidation process is to notify creditors. Informing Creditors will let them know that the company intends to close. Creditors who are owed money from the business will get a chance to help choose a liquidator. They can then submit claims for the debts owed to them. Assets will be sold from the company and then any profits will be given to creditors.
When a company is put into liquidation, voluntary or involuntary, a notice will be published in the Gazette. This is the official public record. This is a legal requirement and offers full transparency. This will make sure all parties involved such as creditors, clients and employees are aware of the liquidation proceedings.
Step 4: Settle Outstanding Debts
When you have outstanding debts, you need to then do the following as a company:
Distribute Company Assets
As a business, it is fair to try and do everything you can to pay off the creditor. The liquidator who has been appointed will take steps during the liquidation to distribute company assets. They will sell any assets that the business still owns and then will provide this to creditors. This will be in the following order:
Secured creditors. These creditors who have collateral will be paid first from the profits of the assets.
Employees are also a priority for any assets sold by the liquidator.
Unpaid taxes will also need to be paid as a priority.
Unsecured creditors will then have access to any remaining assets. They have no legal rights or specific assets to claim against.
Personal guarantees made by directors on company loans may still be enforceable by law. This is legally binding and the director will be personally responsible for paying these out of their own assets. They may have to sell property or investments. If they have no personal funds, they may face bankruptcy.
Addressing Employee Claims
Any employees of the company will become redundant if the company has gone into liquidation. Their contract will be terminated and they will have a right to any unpaid wages and holiday pay. Employees have the right to a portion of any remaining assets from the company. They can also claim redundancy pay from the government if the company can not afford to pay them. The amount they receive will depend on how long they have worked for the company and their current annual pay.
Step 5: Finalise the Liquidation
Once the liquidator has sorted any remaining assets and the company has issued the company will formally be dissolved. To do this, the liquidator will need to send the following to Companies House:
Final accounts of the business
Any liquidation reports
A DS01 form to strike off the company which is £33 when applied online
The company will then be officially struck off the register.
Directors’ Responsibilities
The director will need to comply with all legal obligations during the liquidation process. They need to cooperate with the liquidator and be honest regarding all financial information. They must stop trading immediately when the company is liquidated. Failure to do any of these could lead to lawsuits for unfair trading. They could also find themselves personally liable for debts of the business if they are not transparent.
Best Practices for Directors Closing a Company with Debt
You must act promptly when your company cannot pay its debts. The director should always act in the best interests of creditors. If they delay starting the liquidation process, they could end up in involuntary liquidation which could result in greater liabilities.
They should also comply with the liquidation process, being honest and transparent. Also, they could face potential legal consequences for wrongful trading if they do still trade when they are in liquidation. They must disclose any personal guarantees.
You should also communicate with creditors to be open and offer transparent communication. This will help to make sure a smoother liquidation process occurs. This can also stop any disputes which might result in further legal action. This should also be the case with all employees who will be made redundant when the business is liquidised.
Legal and Regulatory Considerations
Insolvency Act 1986
When closing a company with outstanding debt, the legal requirements are offered in the Insolvency Act 1986. They clearly state the legal framework for liquidating an insolvent company. The director must follow these laws during the insolvency process. The legislation outlines the rights of the creditors and helps to protect them legally. It also states how assets should be distributed during the winding-up process.
Directors' Duties Under Insolvency Law
Directors must act in the best interests of creditors when their company goes into debt that can not be paid off. Insolvency law clearly states the director of their responsibilities. These include providing accurate financial information and cooperating with an appointed liquidator. Failing to do so could lead to the director having to be personally liable for company debts which puts their personal assets at risk.
FAQs
What is the difference between voluntary and compulsory liquidation?
Voluntary liquidation is where a director is unable to pay off debts and decides to go into liquidation. They have to stop trading and take steps to inform creditors. Compulsory liquidation is where creditors have taken action to force the company into liquidation due to outstanding debts.
Can I close a company if it still owes money to creditors?
When a company is in liquidation, one of the steps the appointed liquidator must take is to deal with outstanding debts. They will look at what assets the company has and will normally sell these and distribute the profits to the creditors. Any employees who still have outstanding debts will have to apply for redundancy pay through the government. They will get an amount which will depend on their age, current wages and length of service to the company.
What happens to directors after the company is liquidated?
The insolvency process will look at the conduct of the director and will see if any wrongful trading or misconduct has occurred. Further legal action could be taken if there is evidence to support this. They could also be struck off from being a director for up to 15 years.
How long does the liquidation process take?
The time of the liquidation process can depend on the following factors:
The number of assets of the company.
The amount of creditors involved in the case.
The complexity of the debts of the company
Whether the director has decided to go into liquidation voluntarily.
Investigations are needed regarding the director’s conduct.
Editor's insight: In my experience, simpler cases can take around six to 12 months to liquidate a company with debt. But for more complicated cases, or where liquidation was compulsory, it can take over a year. But every case will be unique.
Can creditors take legal action if a company goes into liquidation?
The independent liquidator should distribute the proceeds of the assets to the creditors during the liquidation process. If disputes are still outstanding, the creditor can consider taking legal action such as making a fraudulent trading claim.
Conclusion
When a business has outstanding debt that can not be paid, a director needs to close the company legally. They need to take the steps of assessing the financial health of the company including all assets. Consider their options to shut the business such as voluntary liquidation. They then need to let their creditors and employees know they are going to close.
The liquidator will then distribute the assets of the business and pay off outstanding debts. The director needs to act quickly and fairly. Seeking professional advice is important to avoid any further liabilities. By consulting with Lawhive’s corporate law experts, you can get personalised advice on closing the business. They will manage the debt responsibility and will ensure the director abides by the law.
References:
Liquidate your company - Gov.uk