What happens to creditors when closing a company?

There are many reasons why you might choose to close your company. You may want to retire, move onto something new or perhaps the company never quite took off. Alternatively, you may be struggling to repay your creditors and you’re worried the company is insolvent. Whatever position you find yourself in, it’s important to know what happens to your creditors when you close the business and how that changes depending on the company closure method.

If you want to close a solvent company – that’s a company that can afford to repay its debts – it will have little impact on your creditors. Your creditors will lose your custom when the business closes, but they will receive all the money you owe them as part of the closure process.

There are two ways to close a solvent limited company:

Members’ Voluntary Liquidation (MVL)

If your company is solvent and has valuable assets and money in the bank to distribute to the shareholders, a Members’ Voluntary Liquidation is usually the most tax-efficient way to close it down. As part of the process, you must sign a Declaration of Solvency to confirm that the company can repay all its debts.

You will appoint a licensed insolvency practitioner to act as the liquidator, who will value and sell the company’s assets and use the funds they raise to repay your creditors in full. They’ll then distribute the remaining funds to the shareholders.

Dissolution

For smaller solvent companies without a high level of retained profits, Dissolution is likely to be the best approach. You can dissolve the company yourself online or by post using form DS01. However, you will need to repay all debts and liabilities before you apply.

If you do not repay all your outstanding debts, your creditors can object to the Dissolution. That has the effect of pausing the process so they can collect the money they are owed. That can also cause problems for the company directors, as your actions could be seen as an attempt to avoid repaying your debts.

The impact on the creditors, particularly your unsecured creditors, is likely to be far greater when closing a company that cannot afford to pay all its debts. As the director of an insolvent company, you must take steps to protect your creditors from further financial loss. You can do that by seeking advice from a licensed insolvency practitioner immediately. They may advise that it’s in the best interests of your creditors to cease trading and close the company down.

There are two ways to close an insolvent company:

Creditors’ Voluntary Liquidation (CVL)

Creditors’ Voluntary Liquidation is a process you initiate yourself. You will appoint a licensed insolvency practitioner to act as the liquidator. They will communicate with your creditors and sell the company’s assets for their benefit. They will use the money they raise to repay your creditors in the statutory order. Broadly speaking, that order is:

• • Secured creditors can seize and sell company assets to recoup their losses.
  • Preferential creditors include company employees with outstanding wages and holiday pay, and HMRC for unpaid VAT and PAYE.
  • Unsecured creditors are suppliers, landlords, customers and other creditors that do not hold company assets as security.

When it comes to repaying the unsecured creditors, it’s often the case that there’s very little money from the sale of assets left. That means they can receive a small proportion of the money they are owed or even nothing at all.

Any debts that remain after all the funds are distributed will be written off and the liquidator will close the company down. In this case, your unsecured creditors will be left out of pocket. The exception here is if you have signed a personal guarantee, in which case, the creditor can pursue you personally for the repayment.

Compulsory Liquidation

If a creditor is unsuccessful in collecting a debt, they can take action that can eventually force your company into liquidation. As a company director, waiting for a creditor to force you into liquidation is not advisable as it can expose you to accusations of wrongful trading and other forms of misconduct.

In Compulsory Liquidation, it’s the court that appoints the liquidator. Similar to a Creditors’ Voluntary Liquidation, their role is to take control of the business and sell its assets for the benefit of its creditors. The creditors are repaid in a strict order and any remaining debts will be written off.

Ordinary, no. As long as you meet your legal duties as a company director, the ‘veil of incorporation’ that protects you from personal liability for business debts remains in place. However, if there is evidence of misconduct, wrongful trading or fraud in your running of the company, you could be made personally liable for some or all of its debts. You could also be disqualified from acting as a company director and even receive a prison sentence in cases of serious fraud.

Company Closure has extensive experience in helping directors to close their company according to the legal requirements of their circumstances. Please get in touch to find out more about how we can help, and to arrange a free, same-day consultation.

Are you unsure which is the right company closure method with your level of creditors, or perhaps you’re worried about personal liability for company debts? Whatever your situation, you can contact our licensed insolvency practitioners for a free consultation or arrange a meeting at our network of offices throughout the UK.