Key points for closing a limited company with debts

14th December 2021

If you are closing a limited company with debts, it can be a stressful time for directors. We look at the creditors’ voluntary liquidation (CVL) process, which is the best option if there are significant debts.

When a company is struggling or you are ceasing to trade for another reason, there are different routes that you can go down depending on your situation. How to close a limited company can be confusing so we look at different options here.

How to start a CVL

If a company does not have enough assets and is insolvent, the directors start the CVL process by seeking a resolution of the company’s shareholders and calling a meeting of the company’s creditors. The creditors then appoint a liquidator who gathers in all of the company’s assets, pays off the costs and expenses of the liquidation and distributes anything left to the creditors, which is generally prorated and paid by pence in the pound, the amount of which varies depending on the debt owed and the amount left in the liquidation.

Under scrutiny

When a company goes into insolvency, the officeholder, whether as liquidator or administrator, has to report the failings of the company to the Insolvency Service. This is an executive agency of the Department for Business, Energy and Industrial Strategy.

What is looked at?

  • The directors’ loan accounts
  • Payments of salary and normal dividends
  • Why has the company failed?
  • Were the directors culpable in any way?
  • Has everything been done by the book?
  • Have the directors followed their accountant’s advice?

If a few shortcuts have been taken or the directors have been deemed to be culpable in any way for the company’s demise then they could face further action. The liquidator might look for the directors to repay some of the money to the company, if they have, for example, borrowed money from the company.

Depending on the degree of culpability, the Insolvency Service might decide to engage in disqualification proceedings. Disqualification can be for a period between two and 15 years. The lower end of the scale would be used if errors were made without intent, or due to ignorance and a lack of knowledge. The more deliberate the conduct, the higher up the scale of disqualification you would go, edging towards fraudulent intent at the maximum end.

Should directors be concerned?

When a company is forced to close with debts, it is perfectly understandable for directors to ask themselves ‘will creditors come after me?’ Most of the time when directors have acted in good faith, there is no need to worry.

Unless, of course, as a director, you have signed a personal guarantee on behalf of the limited company, which would have to be looked at in detail. Here a company director personally agrees to repay any debts of their business if the company fails to pay. If the company fails to pay, whether or not it is insolvent or in an insolvency process, the guarantor will be asked to pay the sum that they agreed to pay to that creditor. However, if the company is struck off the Register of Companies so that the company does not exist, depending on the terms of the guarantee, then the guaranteed debt does not exist either. This will need to be carefully examined to see if the director is under any continuing obligations under the personal guarantee.

Without a certain level of wrongdoing, i.e. a breach of fiduciary duties – failing to act independently or failing to exercise reasonable skill and care – that has caused significant loss to the company, or there is a specific agreement to be liable, then directors will often be okay and not have to personally pay the company’s debts.

Ultimately, the Court would decide whether reasonable care and skill has been used or whether the directors have acted honestly and reasonably so as to be absolved from any liability, but we can advise on anything that might be a problem. If you go down the members’ voluntary liquidation process (assuming that the company is solvent) then it is unlikely that there will be a similar level of scrutiny applied to the directors’ conduct. This is unless some of the creditors have any particularly concerns or the company moves from MVL to CVL.

How can Blake Morgan help with closing a limited company with debts?

Our Insolvency & Business Support team advise insolvency practitioners, funders, debtors, creditors and business stakeholders on the management and recovery of debts and assets. We understand that the insolvency process is not an easy time for anyone involved but can help guide you through the process.

We also assist with restructuring of business groups and can work alongside your tax and accounting advisors to provide you with pragmatic solutions.

Speak to a member of our Insolvency & Business Support team

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