Can I close a company with debts?

It is possible to close a limited company that has outstanding debt, and there are two different options – Creditors’ Voluntary Liquidation (CVL) and compulsory liquidation. Both of these result in your company being permanently struck off the Companies House register.

CVL is a formal route that safeguards company creditors from further financial loss. Compulsory liquidation, on the other hand, is enforced by one or more creditors who petition to wind up the company to recover some of their debts.

When a company with debts closes down, creditors are repaid as far as liquidation funds allow. If you’ve provided any personal guarantees for business borrowing, however, you become personally liable for the amount the company cannot afford to repay.

While a CVL and a Compulsory Liquidation both look to achieve the same result – that of the ultimate closure of an insolvent limited company – there are some differences in how this happens.

With a CVL, the company’s directors have much more control over the process and are able to appoint an insolvency practitioner of their choice to handle the liquidation. When it comes to compulsory liquidation, however, the courts will appoint an Official Receiver to administer the liquidation process on behalf of the company.

When a company becomes insolvent, its directors have a legal duty to prioritise the interests of creditors and place these above the interests of the directors and shareholders. In reality, this means seeking the services of a licensed insolvency practitioner to explore the ways of saving or closing the company in order to mitigate creditor losses.

Be aware that as part of any insolvent liquidation process – whether voluntary or compulsory – an investigation will be carried out to understand the actions of the company’s directors in the period leading up to the company’s eventual slide into insolvency. If a director is found guilty of unfit conduct, they can face director disqualification for a period of up to 15 years.

When you voluntarily enter into liquidation by way of a CVL, therefore, you are demonstrating your desire to shield creditors from suffering further losses. This is not the case if you ignore your company’s problems, allow them to escalate, and are forced into compulsory liquidation by the courts.

Creditors’ Voluntary Liquidation offers important benefits for creditors and directors, including:

Meeting your legal obligations to creditors

Once a company enters insolvency director duties change and the interests of creditors take precedence over those of the business. Fulfilling your legal duties is essential to avoid serious issues such as personal liability.

Director redundancy

If you work for the company under a contract of employment you may be eligible to claim redundancy pay. This could be used to fund the CVL process, repay some of the company’s debts, or support your financial position following the loss of your business.

For more information on closing a limited company with outstanding debts, please get in touch with our expert team. Company Closure offers free consultations and can ensure you take the correct route in closing your company.