If your Limited Company is suffering from debts, it’s a stressful time when it can feel like there’s no way out and closing the company can quickly become an urgent consideration.
Closing a Limited Company with debts is possible, but the legal steps must be carefully followed.
If you’re a director of a Limited Company that cannot pay its bills, choosing to close it by dissolving it with Companies House could be an affordable option compared to liquidation.
Can You Close a Limited Company With Debt?
The short answer is yes, you can close a Limited Company with debt, but it’s generally more difficult than if you were solvent, and it is best to work with an expert team to ensure the process goes smoothly.
If the company has no debt, it can be closed relatively quickly by striking it off the Companies House Register – known as dissolution.
When a business is in financial trouble and builds up debt that cannot be paid, it becomes insolvent. The people or organisations it owes money to are known as creditors.
If your company has some debt, it can still be closed by dissolution. If it has significant debts or assets that can be sold off to help settle the debt. In that case, dissolution is more difficult to achieve, and the assets will need to be liquidated using the services of a licensed insolvency practitioner.
However, this can be costly, and if you have no assets or cannot afford the liquidation process, dissolution may offer an alternative. The steps to dissolving your company must be followed carefully, though, and it is highly recommended that you consult an expert.
Can You Close a Limited Company With Debts to HMRC?
Often, when things go wrong in business, the biggest creditor will be HMRC – whether it be taxes or a PAYE bill left unpaid.
It is not recommended to try to dissolve a Limited Company when it owes money to HMRC without expert help. If you owe a significant debt to HMRC, it’s unlikely you will get far.
HMRC will object to the Strike Off in the same way any other creditor would, and the situation can be handled by experts in company dissolution. The best place to start is by contacting our team at Future Strategy.
It’s also worth noting that outstanding debts to HMRC are not to be ignored. This could result in Compulsory Strike off action or Compulsory Liquidation, known as a Winding Up Order, when a company is ordered to liquidate because it cannot pay its debts.
How To Close a Limited Company With Debts
When closing a Limited Company with debts, directors are generally faced with a choice of liquidation or dissolution.
The most appropriate way to close a Limited Company with debts may well be using the dissolution method to remove the business from the Companies House register.
The choice often boils down to whether or not the company has assets that can be sold to pay off the debts to creditors – a process known as liquidation.
If the company doesn’t have any assets, then dissolution is often a way of closing the company rather than employing the services of an insolvency practitioner and attempting to liquidate the company.
In liquidation, the insolvency practitioner would work with your creditors to ensure they receive the maximum amount possible before it is closed, using a process known as a Creditors Voluntary Liquidation (CVL) or Members Voluntary Dissolution (MVL).
A dissolution involves paying off debts as much as possible and formally applying to have the company struck off from the Companies House register.
It saves on the expenses, fees and costs of liquidation, which can be upwards of £5,000. However, dissolution could be the best option if the company cannot afford liquidation.
There are other benefits to this approach – there’s no need for directors to attend a creditors meeting, and the process is entirely lawful – but it is complex and should be handled by experts.
Dissolution does not affect a director’s ability to trade in the future – so long as the process has been followed correctly and there is no evidence of wrongful trading. However, if the closure is not carried out properly, directors risk fines and severe penalties such as disqualification and even personal liability for company debt.
After Closing a Limited Company with Debts, Can You Start Again?
Yes, you can close a Limited Company with debts and start a new business. But you should be wary – this involves a strict process and should involve professional consultation.
The process of restarting a Limited Company is reasonably similar to starting a Limited Company from scratch. However, there are restrictions to stop directors from simply closing a company and starting again each time they hit financial difficulties.
For starters, you won’t be able to use the same or similar name if your company was subject to a Compulsory Liquidation. However, if you closed your company using a Creditors Voluntary Liquidation, it may be possible – though you would need professional advice on how to do so.
HMRC may also require you to pay a deposit so that if you again cannot pay a debt to HMRC, it can simply withdraw from this fund.
Finally, you may have trouble gaining credit and find that you are held personally liable for debts and unpaid bills should they arise.
Final Notes on Closing Your Limited Company If It Has Debts
Deciding to close a Limited Company with debts is a complicated, often emotional decision, and Future Strategy has dealt with many directors who find themselves in this position. Usually, it’s recommended that liquidation is the only option, but we urge you first to gain expert advice on whether dissolution is viable.
If you want to start a new Limited Company after the successful closure of a company with debts, you should be confident that it’s possible. However, we highly recommend seeking advice and help as the consequences of not abiding by tight restrictions could be severe.
