Closing a Limited Company With Debts: What Directors Need to Know

A company is generally insolvent if it cannot pay its bills when they fall due (cash-flow test) or its liabilities exceed its assets (balance-sheet test). Warning signs include HMRC arrears, a Time to Pay plan you can't meet and unpaid suppliers.

Once the company is insolvent, you must give priority to creditors' interests. Taking dividends, repaying yourself first or moving assets out at this stage can be challenged later.

Striking off with DS01 is for companies that have stopped trading and settled their debts. You must send a copy of the application to every creditor within seven days, and HMRC and other creditors routinely object when money is owed. Using DS01 to walk away from debts can lead to the company being restored, director disqualification and, in some cases, criminal liability.

• Trade on with a plan: if the business is viable, ask HMRC for a Time to Pay arrangement or propose a Company Voluntary Arrangement (CVA) to creditors.
• Creditors' voluntary liquidation (CVL): the directors and shareholders choose to wind up; an insolvency practitioner sells any assets, pays creditors in the statutory order and closes the company. Once the company is dissolved, creditors usually can't pursue its remaining debts, but personal guarantees and any director liabilities still stand. A creditor can apply to restore the company to the register.
• Compulsory liquidation: if you do nothing, a creditor (often HMRC) can petition the court to wind the company up and the Official Receiver investigates.

Acting early keeps you in control and shows you took your duties seriously.

Limited liability protects you in most cases, but watch for:

• Personal guarantees on bank loans, leases or credit cards.
• Overdrawn director's loan accounts, which a liquidator can collect.
• Unlawful dividends paid without enough distributable profits, which can be reclaimed.
• Wrongful or fraudulent trading under the Insolvency Act 1986.
• HMRC notices: HMRC can transfer certain VAT penalties to directors where non-payment was dishonest, and can issue joint and several liability notices in cases of tax avoidance, evasion or repeated insolvency.
• Bounce Back Loans are company debts, but misuse of the funds can lead to disqualification.

Since 1 December 2020 HMRC has been a secondary preferential creditor for VAT, PAYE, employee NIC and CIS deductions. That means it is paid ahead of ordinary unsecured creditors in a liquidation.

1. Stop taking money out of the company and avoid paying any one creditor ahead of the others.
2. Get your bookkeeping, VAT returns and director's loan account up to date.
3. Keep filing with HMRC and Companies House. Late filings add penalties and look bad to a liquidator.
4. Get advice from your accountant and a licensed insolvency practitioner before signing anything.

LimitedCompany.Accountants brings your accounts and director's loan account up to date, works out your real position and introduces you to a licensed insolvency practitioner where that's needed. Get a quote or book a call or ring 020 3441 1258.