What happens to debts when a company is closed?

We speak to hundreds of company directors every year, and understandably, one of their biggest concerns is whether they’ll become personally liable for their business’s debts when it’s closed. The good news is, in most cases, the debts your company cannot repay will be written off.

For your business’s debts to be written off, you must close it using an appropriate procedure and meet your legal duties as a company director. When your company is insolvent, you must protect the interests of your creditors. Failure to do so could lead to personal liability issues and other financial and legal penalties. That’s why you should seek professional advice when your company is struggling.

At Company Closure, we can assess your business’s finances and help you close it in an orderly manner. By dealing with the debts properly, you can walk away and start afresh.

Company Dissolution or Strike Off can be an attractive company closure method as you can administer the process yourself without paying a liquidator. However, it is only suitable for companies with no debts or liabilities.

If you try to strike off a company with debts, creditors such as HMRC and the banks will usually object to your application. The process will then be suspended so they can pursue you for repayment of the debt. They could also take legal action against you, which could lead to Compulsory Liquidation.

Even if no one objects and you successfully strike off a company with debts, creditors can apply to restore the company to the official register even after it has been dissolved. They will then be able to take action against you. Your conduct is also likely to be investigated for attempting to avoid repaying your debts. That could lead to penalties including:

• Fines
• Personal liability for some or all of the company’s debts
• Disqualification from acting as a director for up to 15 years
• The worst cases could even receive a custodial sentence

Given the risks, you should only strike off a company that can repay its debts in full. If it can’t, put it into insolvent liquidation.

Entering into an insolvent liquidation process such as Creditors’ Voluntary Liquidation helps to protect your creditors’s interests and ensures the company’s debts are dealt with properly.

The liquidator will ask the creditors to register their claims and provide proof of the debt. They will then value and sell the company’s assets and distribute the proceeds among the creditors. The creditors are repaid in a strict order of priority, with the secured creditors at the top and unsecured at the bottom.

Once the other debts have been repaid, there’s often little or no money left for the unsecured creditors. As long as the directors have acted properly during the liquidation and in the period leading up to the insolvency, the unpaid debts will be written off and die with the company.

Even if you close your company properly, there are some circumstances when you could become personally liable for its debts.

Personal guarantees

Personal liability issues are most common among directors who sign personal guarantees for company borrowing. In that case, the creditor can pursue you for debts the company cannot pay on liquidation.

Overdrawn director’s loan accounts

If you borrow money from the company you do not repay, your director’s loan account becomes overdrawn. That becomes an asset of the company on liquidation and the liquidator may pursue you personally to recover the amount for the benefit of the creditors.

Director misconduct

You can become personally liable for company debt that would otherwise be written off if the liquidator finds evidence of director misconduct. Examples include paying connected creditors ahead of others, taking a high salary when the company is struggling, paying dividends when there aren’t sufficient profits and selling company assets to a connected party at a discount.

Trading while insolvent

As a director, as soon as you know or should know your company is insolvent, you are legally obliged to maximise your creditors’ interests. That usually means ceasing trading immediately and seeking professional advice from a licensed Insolvency Practitioner. Failing to do so could see you become liable for some of the company’s debts.

If you become personally liable for company debts, the liquidator, or a lender in the case of a personal guarantee, can pursue you for the payment. If you cannot pay the money you owe in full, most liquidators will be open to negotiating a settlement that reduces the repayment or gives you more time.

If you cannot agree on a settlement, the liquidator can pursue you through the courts. At this point, you may have to consider selling or refinancing personal assets to avoid bankruptcy proceedings, which could put your assets, including your home, at risk.

Do you want to close your company but are worried about its debts? Then please get in touch for professional advice. Our licensed Insolvency Practitioners will assess your circumstances, guide you on the appropriate closure method and can also implement the procedure on your behalf. Call our director advice line for a free consultation or arrange a meeting at one of our offices throughout the UK.