Can I Close a Limited Company with Debts and Start Again?

Are you allowed to close a limited company with debts and start again?

In short, yes you can close a limited company with debts and start again, however, there are strict rules to be followed and if there is a claim that it has been done in a fraudulent way the consequences can be severe.

If you are the director of a company which is getting crushed by the weight of enormous debts, then closing it might be the best option so that you can start a new business and not worry about the debts and the various problems that come with it.

 

 

What are your options for closing a limited company with debt?

If all the other options have been explored and you decide the insolvent company needs to be closed, with the potential of starting again, there are three paths which can be taken:

1. Creditors Voluntary Liquidation
2. Administrative Dissolution
3. Compulsory Liquidation (if this route is taken starting again may be more difficult)

The first and second options are undertaken by the director(s) of the company, the third is forced on the company, usually by a creditor. We go into more depth on these below.

We should also point out that these routes are for a simple closure and start again.

If there is ongoing work, commitments or contracts then Business Restructuring or Pre-Pack Administration may be a more suitable.

 

 

Closing the company down options explained:

1. Creditors’ voluntary liquidation

With a creditors’ voluntary liquidation (CVL), the director of the company can stop trading and instruct a liquidator (a licensed Insolvency Practitioner) to liquidate it’s assets.

Before the liquidation of assets, an analysis of the business will be done so that the insolvency practitioner can decide if CVL is the best route. The practitioner will then draft a report, which is to be sent to all creditors.

Within the period of 14 days after the circulation of the report to creditors, the company will enter liquidation.

All creditor claims, employees will be dealt with during this period by the insolvency practitioner, as well as the selling of appropriate assets and issuance of required reports to government agencies.

The monies realised from doing this will then be used to offset the bills for the liquidation process and debts, if any funds are left.

The director will then be investigated by the insolvency practitioner, to make sure that they fulfil their duties and confirm that they are not involved in any wrongful trading so that the outstanding debts can be written off. Otherwise, the director risks prison time, a ban of about 15 years, a fine or being held personally for the debt of the company.

Read Quick Guide To The Liquidation Process

 

2. Administrative dissolution

The administrative dissolution option can be performed by the director themselves, allowing them to retain control and also ensuring unnecessary costs are not incurred.

The process does not demand that 3rd parties, such as insolvency practitioners, are given intrusive access into the business operations and the affairs of the directors personally.

If correctly undertaken, a company dissolution has no lasting negative reflection on the directors.

 

3. Compulsory liquidation

The compulsory liquidation route is typically quite different from a Creditors Voluntary Liquidation, this is because the company is forced into liquidation by a creditor through a winding-up court order.

 

Starting a new company after closing the old one

Starting a new company after closing the old one is usually done in the same manner as starting a completely fresh company, an application is done at Companies House and once the new company is on the register bank accounts etc can be applied for.

However, there are a few things you’ll need to bear in mind…

 

There may be restrictions on the new company

During the process of closing a company laden with debts and starting a new one, there are some restrictions you need to consider, which we’ve outlined below.

These restrictions are purposely put there to prevent directors from establishing a new company simply to escape debts and its related problems.

If a company is created from the liquidation of an old one with the same assets and directors, it is called a phoenix company.

1. Reusing the old company name for your new company

When you liquidate your old company and start a new one, there are restrictions (legally) for using the same name or a similar name.

If the old company was liquidated via the compulsory liquidation route, you cannot use the same name or a similar name.

This is according to Section 216 of the Insolvency Act 1986 which deems it illegal for a person who was a company’s director or shadow director at any time 12 months before the liquidation to be involved in a company with the same or similar name for up to five years after liquidation.

There are however exceptions to this rule:

1. If the new company should acquire the whole, or a large part of the insolvent company, with the arrangement made by an insolvency practitioner who will act as the liquidator, administrator or administrative receiver, or a supervisor of a voluntary arrangement.

Before you can reuse the name in this situation, you must pass a notice in two forms under rule 4.228:

• • You must submit to London Gazette, the official public record, within 228 days of taking the name of the company and buying the assets of the former company from the liquidator. You must state clearly that you are the director of a new company that has the same name or a similar name.
  • All the creditors of the insolvent company must be informed that you are the director of a new company which has the same or similar name as the insolvent company.

2. The new company can also request permission (called ‘leave’) from the court to reuse the name of the former company. There are two conditions that should be taken into consideration.

1. 1. The new company must apply for court leave no more than seven days after the liquidation of the old company.
   2. The leave will be granted by the court no more than six weeks from the date as mentioned earlier.

3. For the third exception, the following conditions must be met according to rule 4.230:

1. 1. The company must have been known by the name for at least 12 months before it was liquidated.
   2. The company must not have been placed in dormancy at any point in the last 12 months.

 

2. HMRC may require a security deposit

Should HMRC believe for any reason that there is a possibility that your new company will fail to pay its tax on time, you may be required to provide a security deposit like a bond or fixed security payment.

If you are unable to pay your taxes to the HMRC, then they’ll settle the balance with the security deposit. You cannot use property or items of high value as a security deposit.

 

3. Goods and assets must be sold at the correct value

Selling the assets of the old company at a price lower than their market value is a fraudulent act. When the company is in distress, you can do a quick sale of the assets at a discounted price.

It is vital to ensure that the business sale is legitimate as creditors can argue the sale of assets at a discounted price.

This means that any assets purchased from the old company, by the new company, must be at a fair and legitimate price.

 

4. Transferring Employees TUPE does not apply

The Transfer of Undertakings (Protection of Employment) also known as “TUPE” regulation is not applicable to employees that are transferred from the old company to the new one due to a compulsory liquidation or CVL. Due to this, contract terms, working hours and other benefits can be easily changed without being seen as unfair.

 

5. Personal guarantees still apply

In a limited company, you won’t be responsible for your company debts personally.

If you have signed a personal guarantee as the director, however, and the company cannot pay its debts, you will be personally responsible. The liquidator will pursue you to repay if you have an overdrawn director’s loan account.

 

6. Limited credit accounts

As a result of poor credit history and rough relationships with creditors, it is unlikely that they provide credit account for your new company without putting extra security in place, like tighter terms or payment in advance.

Get free advice on restarting your company today

If your company is struggling with unmanageable HMRC debts, poor cash flow, or an uncertain future, and you think restarting it may be an option then get in touch for some free advice.

We speak to company directors struggling with the same issues as you every single day, and we are here to give you the help and guidance you need.

If you need some advice on which would be the best option for you why not take advantage of a free consultation, please call us on 0800 975 0380 today or email [email protected]