It may surprise you to learn that closing a business with debts – whether those debts can be paid in full or not – is possible.

If the time has come to close down the company, there are several routes you can take. If your company is solvent and able to pay off its remaining debt, the process is usually straightforward and cost-effective. If the company is insolvent, it becomes a little more complicated, and a little more costly. In this article we’ll look at all of the available options in detail.

These are the options for companies unable to pay their debts:

Creditors Voluntary Liquidation (CVL)

A Creditors Voluntary Liquidation is the best route for companies with assets that can be sold. By law, you must appoint a liquidator – an independent and licensed insolvency practitioner – to take the company through this process.

The insolvency practitioner takes full control of the business during liquidation. A company usually enters liquidation 14 days after a report has been sent out (by the liquidator) to creditors. The liquidator will deal with everything, including employees, creditor claims, the selling of company assets, and filing the required documents.

Funds raised from selling assets will be used to pay for the liquidation process and paying off creditors.

When the process is complete, the liquidator begins an investigation into the director. This is to ensure that no wrongful trading has occurred, and that the director has acted promptly and properly during insolvency. If all is well, any remaining debts are written off.

Compulsory Liquidation

In extreme scenarios, a company is forced to close. Creditors can apply to the courts for your company to be ‘wound up’. If the winding up order is granted an Official Receiver is appointed to liquidate assets, close the company and investigate the director.

You can avoid compulsory liquidation – even if your company is in dire straits – by acting quickly and seeking the help of a liquidation expert. The company can be saved if you take action when a 21-day Statutory Demand for payment is issued. If you don’t, a winding up petition may be filed with the courts, and at this point you only have seven days to resolve the issue before it’s too late.

If the company is able to pay off its debts, the following liquidation and dissolution options are available:

Members Voluntary Liquidation (MVL)

This process allows company directors to formally close down a solvent company. A solvent company is one that can afford to repay its creditors in full. For a Members Voluntary Liquidation to be initiated, 75% of shareholders must pass the winding up resolution.

A liquidator is then hired to sell the company assets, pay off all debts, and distribute remaining funds equally amongst the shareholders.

Members Voluntary Liquidation can be financially beneficial to companies with retained profits over £25,000. Shareholders may be able to claim entrepreneur’s relief, making this a more tax-efficient way to release their capital.

Dissolution (Striking Off)

Dissolution is a simple and very affordable way of closing a business. It is, however, only suitable for businesses able to pay off their debts.

The following must be done in order to dissolve a company:

  • The company should cease trading as soon as possible.
  • All debts owed by the company must be paid. Do not close the company bank account until they have been paid.
  • End the contracts for any vehicles and equipment used by the company (whether leased or purchased).
  • Make the final payroll for staff and file the final payroll return. Issue employee P45s.
  • Complete a final VAT return and deregister for VAT.
  • Prepare the final set of accounts. Inform HMRC that the company has ceased trading.
  • Make the final payment of corporation tax. The company cannot be closed until this has been paid.
  • Remaining assets are to be divided proportionately amongst the shareholders.
  • Following all of the above and three months of business inactivity, directors can fill in form DS01 and send to Companies House. This costs £10.

Provided all of the above has been done appropriately and there are no existing creditor arrangements, the company will be closed.

If you would prefer to keep the company dormant for use in the future, you may do so. You must file an annual return and there is a small fee to keep the name of the company. Allowing your business to remain dormant is a good option if you intend to start trading again eventually.

As this article has shown, there are a number of options for closing down a company with debts. Some may be preferable over others but all have the same end result. If you’re not sure which options is suitable for your business, talk to a professional today.

Carl Faulds is managing director at Portland Business Support and Advice

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