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

In short:

Yes, the same director/owner can close a company with debts and start another business, providing that certain steps have been undertaken.
The company in debt must be closed via a creditors’ voluntary liquidation, dissolution, or compulsory liquidation.
There are restrictions in place for the new company, including rules around the naming of any new enterprise.

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

It’s perfectly legal to close a limited company with debts and start again, however, there are strict rules to be followed. Consequences can be severe should there be any indication that the process has been done in a fraudulent manner.

If you’re the owner of a company struggling under the weight of debt, then closing it can sometimes be the best option. Providing that you follow certain regulations, you may even be able to start a new business without having the debts of your previous venture hanging over you.

Look over your debts

There are several different methods of closing a limited company with debts in the UK depending on whether or not the company is able to pay them off.

The first thing you need to do is find how much your company owes to people. Is it more than the company has in assets and/or cash?

These company debts may include:

Outstanding National Insurance and PAYE on payrolls
Corporation Tax for the final period
Overdrafts and bank loans
Final accountancy fees
Money owed to directors or shareholders of the company
Amounts owed to trade suppliers
Lease agreements or other commitments
VAT for the final period

Once you’ve established how much the company owes and whether there is enough in the bank to repay them you can then decide which would be the best option for closure.

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

If all other options have been explored and you find that that your insolvent company must be closed, there are three paths available which provide the possibility of starting up a new business afterwards:

Creditors’ voluntary liquidation (CVL)
Administrative dissolution
Compulsory liquidation (although, this route can make starting again a little more difficult)

The first and second options are undertaken by the director(s) of the company. The third, however, is forced upon the company, usually by a creditor. We’ll look at all three of these options in more depth below.

Company closure options explained:

Creditors’ voluntary liquidation (CVL)

Generally if the company has assets that can be sold, then a liquidation would be the best route to take.

In a liquidation an insolvency practitioner will take over the company to keep it running whilst the finances are restructured and the assets sold. Debts are then paid off with any money raised.

Liquidations are usually paid for by the sale of the company’s assets and costs can start from around £5000+VAT

There is another way to raise funds to pay for liquidation however, directors of limited companies may be entitled to claim for redundancy pay when their company is struggling and liquidation seems likely.

The average redundancy claim is for around £9,000 and if successful this money can be put towards any liquidation costs.

Read more about redundancy claims here.

The liquidation process

With a creditors’ voluntary liquidation (CVL), the director of the company stops trading and instructs a liquidator (a licensed insolvency practitioner) to liquidate its assets.

Before the assets are liquidated, an analysis of the business is completed which allows the insolvency practitioner to determine if a CVL is the best route. The practitioner then drafts a report which is sent to all of the company’s creditors. This allows them to submit their claims to the liquidator.

The business officially enters liquidation within 14 days of this report going out.

During this period, all creditor claims, including those put forward by employees, are dealt with by the insolvency practitioner. At the same time, the company’s assets are sold off, and the reports are issued to the relevant governmental agencies.

The money realised from the asset sale is then used to offset the bills for the liquidation process and debts either in full or as far as they can. Assuming the liquidator’s investigation shows no underhanded business practices, the remaining debts are then written off.

Potential consequences for wrongdoing

As part of the process, the director is investigated by the insolvency practitioner to make sure that they’ve fulfilled their duties accordingly. The director’s actions are thoroughly inspected to ensure that there’s been no fraudulent activity or wrongful trading. Should the liquidator find any evidence of wrongdoing, the director could face a number of punishments including a ban, a fine, being held personally responsible for the debt of the company, or even a prison sentence.

Administrative dissolution

However, if the company doesn’t have any assets to be sold, or there are no other funds to pay for a liquidation, such as a redundancy claim, then administrative dissolution could be the best route.

This option can be performed by the director themselves, allowing them to retain control and ensure unnecessary costs are not incurred.

As a less-intrusive process, an administrative dissolution doesn’t demand that third parties, such as insolvency practitioners, are given access into the business operations and the affairs of the directors as they are in a liquidation.

If correctly undertaken, a company dissolution has no lasting negative reflection on the directors. While usually reserved for businesses without debts, a dissolution is still a viable option for those with modest arrears.

Here an insolvency specialist would help the director (who retains control of the company) to clear any outstanding debt and formally have the company struck off from the Companies House register.

This solution is generally a lot cheaper than a formal liquidation and maintains the director’s legal obligations, the cost for these can start from around £250 for companies without creditors. Even those with minor debts stand to save a lot of money going via this route, however. If your company qualifies for a dissolution over a liquidation, it’s certainly something you should consider.

See if your company qualifies for Dissolution by taking our free online Dissolution Test →

Compulsory liquidation

Although the process is broadly similar, a compulsory liquidation differs from a creditors’ voluntary liquidation in how it is brought about. This is because the company is forced into liquidation by a creditor through a winding-up court order instead of it being a voluntary process.

Disgruntled creditors can present a winding-up petition to the High Court, with the complaint that the business in question hasn’t paid the money due to them. Compulsory liquidation can also be forced upon a company if they fail to file their accounts. In this scenario, Companies House will simply assume that the business has ceased trading and start proceedings to wind it up.

While these two examples make up the majority of cases, winding-up petitions can also be applied for by shareholders, the Financial Services Authority, Crown Court, or the Insolvency Service’s official receiver.

How to close a company that can pay its debts

If you need to close a limited company with debts and it can afford to pay them off, you may even be able to perform the closure yourself. Here are some steps that would need to be followed:

The company should not take on any further business unless absolutely necessary.
Any loans used by the directors should be repaid.
Every other party that the company owes should be paid.
Keep the company bank account until all debts have been paid off.
Any vehicles or equipment used by the company, whether leased or bought, should be dealt with by contacting the respective companies to agree upon ending the contract.
A final payroll should be run for all staff and a final return of payroll information should be made.
The company should have its VAT registration cancelled once a final VAT return is completed.
As long as one is still in place to oversee the closure, any other directors of the company can choose to resign.
The final set of accounts should be prepared for submitting. The company will only be able to close down once it has stopped trading so there’ll be no further taxable income.
Usually the last payment is that of Corporation Tax. This should be paid out of the company’s bank account.
Capital left over after all the expenses have been paid should be shared amongst the shareholders.
Only after the company has been inactive for three months and all debts are paid will you be able to make an application to have the company dissolved (strike off).

Dissolve a company with a DS01 form

If this is all carried out (and assuming there are no formal creditor arrangements or threats of liquidation) the company can be closed using a DS01 form.

You have the option here to keep the company dormant if you haven’t already had it closed down. There is a small annual fee to keep the name of the company reserved (the annual return). Even if you don’t plan to ever revive the same business, it can be beneficial to keep the name as an older company can sometimes have more financial credibility.

If the company remains dormant for several years, however, the annual fee involved may not be worth it and the company should be closed down through dissolution.

Read – How to Close a Limited Company Yourself

Starting a new company after closing the old one

Starting a new company after closing another is usually done in the same manner as starting from scratch: an application is processed at Companies House and once the new company is on the register, bank accounts and other essentials 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

When a company is created from the liquidation of an old one with the same assets and directors, it is sometimes referred to as a ‘phoenix company’, though this term can have some negative connotations attached.

Liquidation expert, Ben Westoby explains that “such businesses can be controversial in the eyes of the public. While this practice is perfectly legal, there have been some directors that have abused the system and left a sour taste in the mouths of many. This is a shame though, as directors bouncing back from an insolvent business often fare better second time around after lessons have been learnt.”

Addressing the controversy, Westoby added that “suppliers may rightly feel aggrieved at having to write off bills unpaid by liquidated companies, but at least by these insolvent firms opening back up as a different entity, suppliers are able to retain a client for long-term work.”

Those abusing the system tend to close companies and start again simply as a means of avoiding paying large bills. This is what many equate to ‘phoenixing’.

During the process of closing a company with debts and starting a new one, there are some restrictions meant to prevent directors from establishing a new company simply to escape debts without consequence.

The restrictions may include:

Reusing the old company name for your new company

When you liquidate your old company and start a new one, there are legal restrictions in place for using the same or similar company name.

For example, if the old company was liquidated via the compulsory liquidation route, the new company cannot use a name that’s in any way similar to its predecessor.

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 its liquidation to be involved in a company with the same or similar name up to five years after.

Should a director be found to be using a similar name, they can be found liable for the debt the previous business accrued.

There are, however, exceptions to this naming rule:

Using the same name may be possible if the new company acquires the whole, or a large part of the insolvent business, under the supervision of an insolvency practitioner acting as the liquidator, administrator, administrative receiver, or 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 your details to The 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 or similar name.
All the creditors of the insolvent company must be informed that you are the director of a new company with a similar name

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:

The new company must apply for court leave no more than seven days after the liquidation of the old company.
The leave will be granted by the court no more than six weeks from the date as mentioned earlier.
For the third exception, the following conditions must be met according to rule 4.230:
The company must have been known by the name for at least 12 months before it was liquidated.
The company must not have been placed in dormancy at any point in the last 12 months.

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 such as a bond or fixed security payment.

If you are unable to pay your taxes to HMRC they’ll settle the balance with the security deposit. Assets such as property or other items of high value cannot be used as a security deposit.

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. 

It’s vital to ensure that the business sale is legitimate as creditors can argue against the sale of assets at a discounted price. This means that any assets purchased by the new company from the old business must be at a fair and legitimate price.

Transferring employees 

TUPE regulations are not applicable to employees that are transferred to the new company from an old business that was closed via compulsory liquidation or CVL. Because of this, contract terms, working hours and other benefits can easily be changed without being seen as unfair amendments.

Personal guarantees still apply

One of the benefits of running a limited company is that directors aren’t personally responsible for company debts. As the business becomes its own legal entity, it also becomes liable for any debts.

However, if the owner signs a personal guarantee as the company’s director, they agree to be personally responsible should the business be unable to pay its debts. This means that a business owner’s vehicles or even home can be at risk if a loan with such a guarantee can’t be paid.

The liquidator will also pursue directors that have an overdrawn director’s loan account. Westoby explains that “though using a director’s loan account can feel like moving your own money around, it’s important to remember that your company is its own legal entity. As such, if you borrow money from it, it needs paying back just as any other party would.”

Limited credit accounts

As a result of poor credit history and potentially frayed relationships with creditors, it is unlikely that previous suppliers will be keen to provide credit account for a phoenix company. Directors may need to put extra security in place to allay any fears, such as tighter terms or payment in advance.

Difficulty securing finance

That same poor credit history could also hold back any attempts to secure finance, making it more likely that a personal guarantee may be needed in some instances.

Get free advice on restarting your company today

If your company is struggling with unmanageable HMRC debts, poor cash flow, or an uncertain future, it may be better to start again.

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 060 8446 today or email advice@forbesburton.com