Can You Close a Company with Debts at Companies House?

When applying for company closure, it is essential to understand that the application may be approved or rejected. Before starting the application process, review the reasons why a closure application may be rejected.

For instance, if your company owes creditors money, the application may be rejected. During the company closure, Companies House will publish a Gazette notice giving third parties an opportunity to stop the closure.

So, can you close a company at Companies House if you have debts? Read through to understand why you cannot close an indebted company at Companies House.

Understanding company closure at Companies House

Company closure can happen in several ways, either voluntarily or by compulsory strike off. When company directors come together and decide to close down the company, that is known as voluntary company dissolution.

On the other hand, Companies House may forcibly strike off your company from the public register due to failure to submit necessary documents. This happens after several warnings and notices are sent to the company, and they do not respond.

Company closure is typically used when the company is dormant and debt-free. If a company is insolvent, it may be required to follow the liquidation process

Why would Companies House reject the closure of companies with debt?

Creditors’ objection to the closure

Creditors have the right to reject the company’s dissolution if it owes them money. Creditors must be notified within 7 days of the company’s closure application. The creditors’ objection is intended to give them time to chase their debts.

Outstanding tax liabilities

HMRC may also object to the company closure if it has unpaid taxes, such as VAT, PAYE, or Corporation tax. The closure will be rejected to give time for HMRC to recover all unpaid taxes owed.

Liquidation procedure

If HMRC finds out that the company is going through a formal legal process due to a lack of financial obligations to pay creditors, the closure may be rejected. The rejection will allow the procedure to be followed to its conclusion.

Why can’t you dissolve a company with debt?

Creditors’ rights: Dissolving a company without addressing debts unfairly impacts creditors, who have a right to be paid.

Director responsibilities: Directors have a legal duty to act in the company’s best interests, including its creditors, especially during financial difficulties.

Potential for restoration: If a company is dissolved with debts, a creditor can apply to have it restored to the companies register later to pursue payment, as noted by Greenfield Recovery Ltd.

The correct procedure for insolvent companies

Liquidation

The proper method for closing a company with debts is through a liquidation process. Liquidation is still a method of closing a company that has liabilities to be dealt with. With the company owing creditors, the liquidation process involves the sale of assets and redistribution to creditors.

There are three ways a company can liquidate: they include

•         Compulsory liquidation
•         Creditors’ Voluntary Liquidation (CVL)
•         Members’ Voluntary Liquidation (MVL)

Compulsory liquidation

This is where a company is forcefully closed down. This is started through a court order, which is presented in the High Court by creditors. The winding-up petition presented to the High Court states that the company owes them money, and the company cannot pay.

The winding-up order can be made even when the company has no assets or the disputed amount.

Creditors’ Voluntary Liquidation (CVL)

This is a formal process where directors and shareholders decide to wind up the company because it is unable to pay its debts. This process does not involve any court order.

The difference between CVL and members’ voluntary liquidation is that in CVL, the company director makes a declaration that the company will be able to pay the debts owed within a maximum period of 12 months.

Members’ Voluntary Liquidation (MVL)

MVL is a process of winding up a solvent company, allowing company directors and shareholders to extract the value of the business in both a tax-efficient and cost-effective manner. An MVL can either be used to bring an entire company to an end or to close down an unwanted or non-performing subsidiary within a larger group of companies.

What are the directors’ responsibilities and risks?

During the company closure of any sort, whether voluntary or compulsory, directors have a responsibility to play until the company is completely closed. Their responsibilities include;

Settling debts: If the company is owed by creditors, the company director must ensure the debts are settled before the company is closed. If the company is unable to pay debts immediately, the director can initiate the liquidation process.

Ensure all outstanding taxes are paid: It is always the directors’ responsibility to ensure the company’s taxes are filed on time to avoid penalties. However, if under any circumstances, the company has outstanding taxes, the director must ensure it is settled with HMRC before closing the company.

Wrongful trading and personal liability risks: Once the company has decided to undergo closure, the director must ensure the company is not trading within three months of the closure date. Additionally, if the company continues to trade even after closure, the director may be held responsible, putting their personal liability at risk.

Duty to act on the creditor’s interest once insolvent: if the company is insolvent and can’t pay debts immediately, it can undergo the liquidation process; however, the director must ensure that creditors are informed of how the debts will be paid.

This process can be complex and tiring, especially if you are new to everything. You can speak to experts about dissolving your company with debts. By calling Icon Offices, we can advise on whether to dissolve the company or liquidate it.

Contact us today to wind up your company seamlessly at [email protected].