Closing A Company With Debts And Starting Again?

Closing a company with debts and starting again? Written by: John A Waller Director. Revised June 10th, 2024.

Yes!

But companies must follow strict rules to avoid fraudulent means by directors, as they risk severe consequences.

So designed to stop company directors from starting a new company to avoid debt. A company created from the ashes of another company with the same assets and directors remains referred to as a Phoenix company.

If you’re the director of a company that cannot trade due to debt? Then closing might be the best option, allowing a new business to be formed free from debt.

Can I close a limited company with debts and start again? If so, which liquidation should I choose?

With an insolvent company, two options exist to liquidate:

Creditors Voluntary Liquidation CVL

Choosing a Creditor’s Voluntary Liquidation allows directors to terminate trading voluntarily and select a licensed Insolvency Practitioner to act as the company’s liquidator. The liquidator can then legally realise the company’s assets to distribute funds to the creditors.

Before liquidating the business, the insolvency practitioner evaluates whether they should convert it into a CVL. If a company agrees that a CVL remains the correct procedure, the IP prepares a report explaining its financial situation and then circulates it to all known creditors.

Once creditors receive the report, the company starts liquidation within 14 days. The liquidator deals with creditors and employees, sell assets and issues reports during this time. The funds pay the liquidation costs and then be distributed to creditors if a balance remains.

As part of the liquidation process, the liquidator investigates the conduct of the directors.

Finally, any debt not paid from realising the company’s assets remains written off.

However, should the report on the directors prove any wrongdoing, then the directors face:

  • personally held liable for the company’s debt;
  • A directors disqualification up to 15 years;
  • a fine;
  • A custodial sentence.

Administrative dissolution

A limited liability company may ask the registrar to withdraw from the register and dissolve.

The company can do this if it’s no longer needed. For example, if the –

  • Directors wish to retire, and there is no one to take over the company;
  • The company is a subsidiary whose name is no longer needed;
  • Directors initially set up the company to exploit an idea that was not feasible.

Some dormant companies, not trading, can choose to apply for a strike-off. Suppose you decide not to retain your company and wish it struck off. In that case, the registrar will usually not pursue any outstanding late filing penalties unless you restore the company to the register later.

This procedure is not a substitute for any other insolvency proceedings where fitting. Even if the company is struck off and dissolved, creditors and others could apply for the company’s restoration to the register.

Compulsory Liquidation

Having your company wound up by a Compulsory Liquidation is usually involuntary and instigated by a company’s creditor, such as HMRC.

Closing a Company with Debts to HMRC

When liquidating a limited company, the process writes off all corporate debts, including HMRC. All the debt the company has, including unpaid taxes, ceases with the company’s liquidation if the liquidator fails to realise any money.

Therefore, once insolvent, anyone who owes money remains a creditor. During insolvency events, creditors remain paid in strict order of priority.

Since December 1st, 2020, HMRC has been a preferential creditor. Therefore, it is one of the first to be paid, following those creditors with secured assets.

HMRC explains their position as a preferential creditor here.

Can HMRC investigate a dissolved company?

Sometimes, creditors miss the objection to striking off, and the company dissolves. Nevertheless, any creditor (including HMRC) must apply to reinstate the dissolved company to the register if carried out incorrectly.

Anyone owed money may reinstate companies for up to twenty years after the initial strike-off.

If directors are found guilty of misconduct, liabilities or penalties will still apply, including personal liability for corporate debt.

Can I close a company with debts and start again? – Reuse of former Company Name

In the UK, legal restrictions exist for using the same company name or similar name following the liquidation of your former company and then starting a new company.

The provisions of the Insolvency Act 1986, sections 216 and 217 were introduced to tackle Phoenix syndrome.

The restrictions apply to a company director of a limited company at any time in the 12 months before it goes into insolvent liquidation, even though there may have been any misconduct or dishonesty in relation to the failure.

Restrictions on restarting a company

To prevent directors from building up debt with a company and then liquidating it to restart a new company, directors must first meet several restrictions to prevent directors from closing a company without facing the consequences.

  • Reusing the company name 

A new Phoenix company cannot use the same trading name as its predecessor. There are certain times directors can do this. However, it must be under the legal requirements of Section 216 of the Insolvency Act 1986.

  • HMRC security deposit

If HMRC believes there’s a risk your company may fail to pay its taxes, they may require a security deposit.

  • Goods and assets

All goods and assets bought from the insolvent company by a new company must be purchased at market value.

  • Moving employees 

Employees of the company in liquidation can move to the new Phoenix company and negotiate new contract terms, working hours and benefits. However, directors of the Phoenix company should take advice regarding the transfer of employment liabilities.

Find out more about phoenix companies and the role of the Insolvency Service.

Contains public sector information licensed under the Open Government Licence v3.0.

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