The-Legal-Ramifications-of-Winding-Up-a-Company-With-Debts

What are the legal consequences of winding up your company with debts? 

On 28 March 2020, the government revealed fresh measures to help struggling businesses due to the coronavirus. Changes to insolvency law will provide companies with a pause to continue operations while they seek rescue options. Wrongful trading rules will also be temporarily stopped, going back to 1 March 2020, for three months.

For additional details, you can explore further here. Directors must remember their duty to creditors and shareholders. Seeking early advice remains the best safeguard against criticism.

 

Closing a Company with Outstanding Debts: Strategies for Closure

Deciding to close a struggling company can pose challenges, particularly concerning legal implications and complexities related to debts. 

You might wonder if personal liability is at stake for company debts or if closing a company with outstanding debts could lead to wrongful trading accusations. 

Regarding debts after dissolution, who bears the responsibility for settling them?

Thankfully, directors of a limited company aren’t personally responsible for the company’s debts. Thus, liquidation and dissolution wouldn’t impact directors’ personal credit or finances. However, in rare cases, directors may face personal liability if they’re found guilty of wrongful trading.

 

How will you protect yourself as a Director? 

When a board of directors opts for voluntary liquidation and dissolution of a debt-laden company, they must proceed cautiously. The liquidator will conduct a post-liquidation investigation to ascertain if any directors engaged in wrongful trading or misconduct.

If a director is found guilty, they could face a ban from acting as a director of any limited company for up to 15 years. Additionally, they might incur substantial financial penalties.

To avoid such complications, it’s advisable to seek advice from an insolvency practitioner and opt for voluntary liquidation instead of waiting for a creditor to initiate compulsory liquidation through a court order.

 

Understanding The Role and Value of an Insolvency Practitioner

In every formal procedure, the insolvency practitioner must prioritise the interests of the creditors. Consequently, legally, the dissolution of a company cannot occur without first determining whether it would offer the most favourable outcome for creditors.

Simply, our responsibility entails assessing whether, based on our professional judgment, the company won’t be able to fulfil its obligations going forward.

By liquidating the company outright, the insolvency practitioner might repay creditors using the proceeds, thereby dissolving the remaining debt and the business itself.

 

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How will you deal with Pre-Existing Legal Actions? 

If creditors have already initiated legal actions against your company and you’re seeking voluntary liquidation, the court may opt for compulsory liquidation instead.

In such a scenario, your company would still face dissolution, but the liquidation process would be overseen by a court or creditor-appointed liquidator, rather than an insolvency practitioner selected by your board of directors.

However, it’s always advisable to opt for voluntary administration rather than awaiting forced winding up by creditors. Even if a creditor has already filed a petition for receivership, administration, or liquidation, voluntarily entering company administration may still offer the possibility of delaying these proceedings.

If you’re worried about the legal consequences of liquidating a debt-ridden company, please don’t hesitate to reach out for a complimentary consultation. 

We’ll guide you through the process of winding up your company and provide insights into whether exploring alternative options might be beneficial.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

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.