Closing a company with debts

You have the option to shut down a company with unpaid debts by opting for an insolvency procedure called a Creditors’ Voluntary Liquidation (CVL). Through a CVL, the company will be concluded, and creditors will receive repayment to the best extent possible. Debts linked to the company will be cleared during this process, but the director who guaranteed any debts personally will bear responsibility for repayment.


Can I close a company with debts and start again?

As the director of a company facing financial challenges, you might be contemplating liquidation to pave the way for a new business, free from the burden of outstanding debt.

For more details regarding closing a business, please visit our primary page on Closing a Limited Company.

Before deciding on liquidating your present company, it’s crucial to assess whether its financial situation can be improved. Just because a company is struggling to settle its debts doesn’t necessarily mean it’s beyond recovery. Many businesses can bounce back if prompt action is taken during early financial distress, implementing a viable plan to turn the company around.

If your company is grappling with debt issues, you’re not alone. Numerous businesses encounter financial difficulties at some point. Some face short-term cash flow problems, swiftly resolved, while others may require professional assistance from a licensed insolvency practitioner.

The positive news is that various rescue and recovery options are available, potentially aiding your business in overcoming its current debt challenges.


Liquidating a company with debts

Regrettably, there are instances when a company’s debt issues reach a point beyond recovery. In such situations, it might be the most suitable resolution for all parties involved to explore avenues for closing the company and concluding its affairs through a formal liquidation process.

An insolvency practitioner will be appointed to oversee the process on behalf of the company. They will communicate with creditors, strive to repay company debts to the best extent possible, and ultimately dissolve the company at Companies House. Given the gravity of this step, it’s essential to discuss all available options with a licensed insolvency practitioner before deciding on a course of action.

For an insolvent company, there are two paths to liquidation: Creditors’ Voluntary Liquidation (CVL) and Compulsory Liquidation (WUC).


Creditors’ Voluntary Liquidation

A CVL is a process initiated by the director, enabling them to voluntarily stop trading and appoint a liquidator, who must be a licensed insolvency practitioner, to liquidate assets. During the liquidation, the insolvency practitioner will manage creditor claims, address employee matters, sell assets, and submit necessary reports to government agencies. The proceeds generated will cover the costs of the liquidation process, with any surplus funds allocated to settling outstanding creditor claims.


Compulsory Liquidation

Although the Compulsory Liquidation process shares similarities with a CVL, it distinguishes itself by compelling the company to undergo liquidation through a winding-up court order, rather than directors initiating the process voluntarily. Compulsory liquidation can be initiated by a dissatisfied creditor when all other attempts to recover debts have proven unsuccessful.


Reusing a company name after liquidation

Once a company undergoes liquidation, its directors, unless subjected to a disqualification order, typically have the freedom to incorporate another limited company if they choose.

However, when liquidating a debt-laden company and establishing a new one, various legal requirements and restrictions must be considered. These measures are in place to prevent directors from creating a new company as a means to evade debt and its consequences. A new company emerging from the liquidation of an old one, with the same assets and often the same directors, is termed a phoenix company.

Legal constraints exist for using the same or a similar company name after liquidating the old company and starting a new one.

If the old company entered compulsory liquidation, using the same name or a similar name is prohibited. Section 216 of the Insolvency Act 1986 deems it illegal for the director or shadow director, within 12 months before the liquidation, to be involved in another company sharing the same or a similar name for up to five years.

There are three exceptions to reusing a company name in this scenario.

1) Where the new company acquires the entire or majority of the entire insolvent company, as arranged by an insolvency practitioner serving as the liquidator, administrator, or administrative receiver, or as a supervisor of a voluntary arrangement.

To reuse the name in this situation, notice must be provided in two forms under rule 4.228:

  • A submission must be made to the London Gazette, the official public record, within 28 days of adopting the name and acquiring assets of the predecessor company from the liquidator. The notice must declare that you are the director of a new company with the same or a similar name.
  • Each creditor of the former insolvent company must be notified that you are the director of a new company with the same or a similar name.


2) The second exception under rule 4.229 entails the new company seeking court permission, also known as ‘leave’, to reuse the name of the insolvent company. 

The following two conditions should be considered:

(a) Court leave must be sought no later than 7 days from the date the company entered liquidation.

(b) The court will grant leave no later than 6 weeks from this date.

3) The third exception, as per rule 4.230, indicates that the name of the insolvent company can be retained.

 If the following conditions are met:

(a) The company has been known by that name for the last 12 months before entering liquidation.

(b) The company must not have been placed into dormancy in the last 12 months.


HMRC security deposit

If HMRC suspects that your new company might be at risk of not meeting its tax payment deadlines, they may ask for a security deposit, like a bond or fixed security payment. In the event of non-payment to HMRC, the outstanding amount will be covered by retaining the security deposit. Properties and high-value items cannot be utilised as a security deposit.


Goods and Assets

Selling company assets at a price below their market value when the business is confirmed as insolvent constitutes an act of misfeasance. This is referred to as a Transaction at Undervalue, and the appointed insolvency practitioner is obligated to scrutinise such transactions in accordance with CDDA requirements.


Transferring Employees

TUPE, the Transfer of Undertakings (Protection of Employment) Regulations, does not extend to employees moving from the old company to the new company during compulsory liquidation or CVL. Consequently, alterations to contract terms, working hours, and other benefits can be made without being deemed unfair.


Debt Guarantees

A limited company is a distinct legal entity, that shields you from personal liability for company debts. This structure is termed limited liability.

Nevertheless, if you’ve provided a personal guarantee for any company loans, you will bear personal responsibility for repayment if the business cannot meet it. Additionally, in the case of an overdrawn director’s loan, the liquidator may seek repayment from you.

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Limited Credit Accounts

Due to poor credit history and strained relationships with creditors, they might be reluctant to grant the new company a credit account without additional security measures, such as stricter terms or an advance payment.

If liquidating your business and starting anew is the optimal choice, your next step is to engage an insolvency practitioner. After settling the commercial debt, you can focus on establishing a new business, incorporating lessons learned from your previous venture.

For a discussion about your company’s liquidation with a Vanguard Insolvency expert, contact one of our licensed insolvency practitioners. We can arrange a free, same-day consultation at various UK offices nationwide.

David Jackson MD
Senior Partner at Vanguard Insolvency Practitioners | Website

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.