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What happens to debts when I close a company?

Financial decline can occur steadily over time or sometimes unexpectedly – perhaps due to the loss of a key customer. When debts become unmanageable, however, it’s not always possible for the business to recover.

This can lead to the difficult question of what happens to the debts if you want to close the company and move on. In this situation where a business is insolvent, there’s a formal procedure called Creditors’ Voluntary Liquidation (CVL), which you must follow to close down your company.

Although entering CVL means that the company will close with outstanding debts, doing so enables you to protect your creditors’ financial interests as is required under insolvency laws.

Your responsibilities to creditors if your company has debts

If your business is insolvent you must take steps to protect your creditors from further unnecessary financial loss. This is achieved by stopping trade and seeking assistance from a licensed insolvency practitioner.

Failing to do this has serious ramifications that can lead to disqualification as a director, personal liability for the company’s debts, and even imprisonment if serious fraud is later uncovered.

It’s not advisable to wait for a creditor to force you into liquidation as this exposes you to accusations of wrongful trading and other forms of misconduct. By initiating Creditors’ Voluntary Liquidation as a director, you can take control of the situation whilst also fulfilling your legal obligations.

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What happens to debts during Creditors’ Voluntary Liquidation?

This official process involves appointing a licensed insolvency practitioner to realise company assets and distribute the proceeds to creditors in the statutory order. There are three broad categories of creditor – secured, preferential, and unsecured.

  • Secured creditors can recoup their money by taking possession of the secured asset
  • Preferential creditors include employees and HMRC for some tax debts
  • Unsecured creditors include trade suppliers and customers, but this group typically receives very little in the way of repayment

Unsecured debts are usually written off, particularly if the company owns few or no assets. So what are the implications for you as a director in this situation?

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Beware of the risks of unregulated advisers – only licensed insolvency practitioners can handle insolvency appointments and closure procedures from beginning to end. In contrast, unlicensed insolvency advisers will pass your enquiry onto a third party and charge a premium for doing so. Contact our licensed, specialist team today for FREE.

Are you liable for your company’s debts?

As long as there’s no evidence of misconduct having led to your company’s financial decline the ‘veil of incorporation’ that protects you from personal liability remains in place. This means that you can move on from running a business with debts as the company closes down permanently.

If you’ve provided a personal guarantee for a business loan you’ll be liable to repay the full outstanding amount, but in general, the corporate structure protects you from liability. Entering CVL clearly has advantages for business creditors in minimising their losses, but it can also benefit you as a director.

You may be able to claim director redundancy pay if you work under a contract of employment and take a regular salary under PAYE, and this could be used to pay for the CVL process if required.

For more information on what happens to debts when you close a company, please get in touch with our expert team at Company Closure to arrange a free consultation.

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We are licensed by recognised professional bodies and have helped thousands of directors over many years. Contact us today for your free company closure consultation.

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