A Concise Guide To Closing A Limited Company With Debts

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If your company is struggling with debts, you’re likely to be considering your best options for closing it down. If you’re not sure where to begin, don’t panic! That’s exactly what the following guide is here to help you with. Step-by-step, we’ll take a look at the process of closing a limited company with debts from start to finish. So, without further ado, let’s get started.

Declaring The Company Insolvent

A company is declared ‘insolvent’ when it can no longer pay its debts and when its debts are greater than its assets. There are many warning signs that your company may be insolvent, such as cash flow problems and pressure from creditors. You can read more about the signs of insolvency in our previous article. The easiest way to check if your company is insolvent is via the ‘balance sheet test’. This involves looking at all your company’s assets and placing them against any debts your company has. If the comparison shows the debts to be greater than the assets, then the company is insolvent. Once you have determined that your company is definitely insolvent, it’s time to start looking at how to close it.

Options For Closing A Limited Company With Debts

When your company is insolvent then legally the interests of the people to whom your company owes money (its creditors) take priority over the interests of the company’s shareholders and directors. This means that you may need to liquidate the company’s assets in order to pay your debts to creditors. There are two liquidation options for insolvent companies. These are:

In some instances, it may be possible to rescue an insolvent company by way of some form of restructuring or a formal company rescue procedure. These are not explored in this article but will always be considered as part of any advice we provide.

1. What Is A Compulsory Liquidation?

A compulsory liquidation is when a company is forcibly shut down when they are unable to pay their debts. The process is initiated by a Winding Up Petition (WUP) which will usually be issued by a creditor. When it comes to closing a limited company with debts, compulsory liquidation should always be avoided where possible as it means that directors lose control. Instead, directors should be proactive in closing a limited company with debts, and this brings us to our next point.

2. What Is A Creditors’ Voluntary Liquidation (CVL)?

If your business is insolvent, then a CVL is the best option. This involves the company putting itself into liquidation rather than waiting to be forcibly shut down. This puts company directors in control, preventing further legal action, removing creditor pressure and giving the company the opportunity to claim redundancy and statutory entitlements from the government.

What Does A CVL Process Look Like

The first step in a CVL is to appoint a licensed insolvency practitioner who will act as liquidator and guide you through the process. The liquidator will investigate the company’s financial affairs and distribute the assets accordingly. Upon completion of the CVL, the company will be struck off the Companies House register (dissolved). You can read more details about the process of a CVL in our article covering how to place a company into voluntary liquidation.

The Importance Of Being Proactive

When it comes to closing a limited company with debts, it’s always best to be proactive. As soon as you spot signs of insolvency within your company you should consider your options for liquidation. This will put you as a director, in control of the process and put you in the best financial position for closing your limited company.

For more information about closing a limited company with debts, please don’t hesitate to get in touch with our knowledgeable team who will be able to advise you on all aspects of an insolvent liquidation.

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