Close an Insolvent Company

An insolvent company is one which is unable to pay its debts and other outgoings as and when they fall due and/or when its liabilities are greater than its assets. When a company becomes insolvent, it is vital that swift action is taken to help protect creditors from further losses, and ensure directors are complying with their legal responsibilities during this time.

Strike off is designed as an easy and straightforward way to close a solvent company; despite this, some directors will attempt to dissolve their insolvent company using this method. Most strike off applications made by insolvent companies will be suspended when a creditor becomes aware of their plan and lodges an objection with Companies House to halt the process.

If an insolvent company is dissolved using the strike off process, there is always the risk that a creditor could come back at a later date and apply to have the company restored to the register so that outstanding debts can be chased. If you are in any way unsure as to whether you should close your insolvent company through liquidation or by applying for strike off, consult a licensed insolvency practitioner for further guidance before going any further along the closure process.

As part of the CVL process, the insolvency practitioner will work to identify all assets belonging to the insolvent company, before having these valued and sold. Proceeds will be used to pay off outstanding creditors of the company as far as possible according to a payment hierarchy as set out in the Insolvency Act 1986.

Due to the nature of the company being insolvent, however, there will be a shortfall between the money raised through liquidating company assets and the total amount which is ultimately owed by the company. This shortfall will be written off when the liquidation is complete and the company officially closed at Companies House.

The exception to this is any debts which have been secured by a personal guarantee. Any borrowing which has been personally guaranteed will remain active after the closure of the business and the responsibility for paying the remaining amount will fall to the individual who provided the guarantee.

While many companies will find themselves insolvent at some point, this does not mean the situation should not be taken seriously. Once a company is knowingly insolvent, its directors have a number of legal responsibilities which they must adhere to. One of these is to act in the best interests of creditors, rather than the interests of the company and its shareholders.

It is therefore not an option for a company to continue trading on when you know the company is insolvent. Continuing to increase liabilities or decrease assets is a breach of your duties as the director of a limited company, and you could face serious repercussions if action is not taken to manage the situation.

Taking the advice of a licensed insolvency practitioner at the first signs of insolvency demonstrates your desire to priorities the interests of creditors and adhere to your legal obligations in this matter.