Can I close a limited company with debts and start again?

What are your options for closing a limited company?Yes, you can close a limited company with debts and start again. Restarting a limited company is a process whereby a new company is formed and registered with Companies House, taking on the assets and liabilities of an existing company.

The existing company is then wound up. While this may seem like a simple way to rid yourself of debt, there are strict rules that must be followed to ensure that the process is not considered fraudulent.

If the directors of the existing company are found to have acted inappropriately, they may be held liable for the debts of the company and face severe consequences. As such, it is important to seek professional advice before taking any action.

Restarting a limited company can be a viable option for those struggling with debt, but it is not without risks. Careful planning and expert advice are essential to ensure that the process is carried out correctly

What are your options for closing a limited company?

Once you have explored all If all options and you decide that your limited company needs to be closed, there is a potential of starting again, there are three closure options which can be taken:

  1. Creditors Voluntary Liquidation
  2. Administrative Dissolution
  3. Compulsory Liquidation 

Option one and two are when a director is in control of the process, option three is when a creditor has forced the closure of the company.

If the business has ongoing work, commitments or contracts then a pre-pack administration may be a more suitable route for closing an insolvent company

Closing the company down options explained:

1. Creditors’ Voluntary Liquidation

Creditors’ Voluntary Liquidation (CVL) is a type of insolvency procedure whereby the company is wound up and its assets are distributed among its creditors. This process is initiated by the directors of the company who then appoint an insolvency practitioner (IP) to oversee the liquidation. The IP will then convene a meeting of creditors where a vote is taken on whether or not to place the company into CVL.

If the vote is in favour, the company will be wound up and its assets sold off to repay its debts. However, if the vote is against, the company may be placed into administration or another type of insolvency procedure. CVL is often seen as a last resort for companies which are no longer viable and as such, it can have a negative effect on the company’s reputation. Nonetheless, it can be an effective way of dealing with unmanageable debt and ensuring that creditors are repaid as much as possible

2. Administrative Dissolution

Administrative dissolution is a process undertaken by the directors of a company to bring about the end of the company. 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. Administrative dissolution allows the directors to retain control over the end of the company and also helps to ensure that unnecessary costs are not incurred. As a result, it can be an attractive option for directors who are looking to bring their company to an end.

3. Compulsory Liquidation

Compulsory Liquidation 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. The Compulsory Liquidation process begins when a creditor petition is lodged with the court, and this will trigger the appointment of a provisional liquidator. Once appointed, the provisional liquidator will take control of the company’s assets and begin the process of realising them.

This can be a lengthy and complicated process, and it is often necessary to engage the services of a professional liquidator in order to ensure that all assets are properly accounted for. Once the liquidation is complete, all creditors will be paid in full and any remaining assets will be distributed to shareholders. Compulsory Liquidation can be an extremely stressful process for all involved, and it is important to seek professional advice as soon as possible if you think your company may be at risk.

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 and other credentials can be applied for. There are a few things you’ll need to bear in mind, however.

You’ll need to choose a new name for the company that isn’t already registered with Companies House. And finally, you’ll need to ensure that you have all of the necessary paperwork in order before submitting your application. If everything goes smoothly, you should be up and running with your new company in no time.

You will also need to be aware of a few important issues such as:

There may be restrictions on the new company

When a company is laden with debts and goes through the process of liquidation, there are certain restrictions placed on the directors of that company in order to prevent them from simply establishing a new company (known as a phoenix company) to escape those debts.

Some of these restrictions include: a) being barred from serving as a director for a certain period of time; b) being required to disclose their involvement in the old company when applying to be a director of the new company; and c) being prohibited from using the same name or trading under a similar name to the old company.

While these restrictions may seem unfair, they are put in place to protect creditors and other stakeholders from directors who might try to use a phoenix company as a way to avoid their responsibilities

The following restrictions may apply:

1. Reusing the old company name for your new company

According to Section 216 of the Insolvency Act 1986, it is illegal for a person who was acompany’s director or shadow director at any time 12 months before the liquidation to be involved in acompany with the same or similar name for up to five years after liquidation. Reusing the old company namefor your new company would therefore be in breach of this act.

This applies regardless of how the oldcompany was liquidated, whether via the voluntary or compulsory liquidation route. The five year period isshould be seen as a cooling off period, during which time you are not allowed to be associated with acompany that has the same or similar name to the one you were previously involved in.

After this fiveyear period has elapsed, you would then be free to use the old company name for your new business.

There are exceptions however 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 the Gazette which is 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. 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. 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 dormant at any point in the last 12 months.

2. HMRC may require a Security Deposit

HMRC may require a security deposit from new companies if they believe that there is a possibility that the company will fail to pay its taxes on time. The deposit can be in the form of a bond or fixed security payment, and it will be used to settle the balance if the company is unable to pay its taxes. HMRC cannot accept property or items of high value as a security deposit.

This policy is in place to ensure that HMRC is able to recoup the taxes owed, even if the company ultimately fails. While it may be an additional expense for new businesses, it is a necessary one to protect against the potential losses that could be incurred if taxes go unpaid.

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

Goods and assets must be sold at the correct value, in order to prevent any fraudulent activity. When a company is in distress, it is common for businesses to try and do a quick sale of assets at a discounted price. However, this can be seen as a fraudulent act, as creditors could argue that the sale was not legitimate.

In order to ensure that the business sale is legitimate, it is important that the assets are purchased at a fair and reasonable price. This will help to prevent any legal issues from arising, and will ensure that the companies involved are acting in an ethical manner.

4. Transferring Employees TUPE does not apply

Transferring employees from the old company to the new one has been a difficult process, but the Transfer of Undertakings (Protection of Employment) regulation has made it much easier. TUPE protects the rights of employees and their contract terms, working hours and other benefits.

However, TUPE does not apply to employees who are transferred due to a compulsory liquidation or CVL. This means that the new company can change their contract terms, working hours and other benefits without being seen as unfair. This is a huge advantage for businesses, as it allows them to easily transfer employees without having to worry about their rights being protected.

4. Personal Guarantees still apply

In a limited company, the company itself is liable for its debts, not the individual directors. This means that if the company cannot pay its debts, creditors cannot come after the directors to recoup the money. However, there is an exception to this rule: if a director has signed a personal guarantee, they will be held liable for the debt if the company cannot pay it.

Personal guarantees are often required by creditors, such as landlords or banks, in order to protect themselves from nonpayment. If a company goes into liquidation and the director has an overdrawn director’s loan account, the liquidator will also pursue them for repayment. In short, while limited liability offers some protection for directors, it is not absolute. Personal guarantees can still leave directors on the hook for their company’s debts.

5. Limited Credit Accounts

Limited credit accounts may seem like a hindrance to your new company, but there are actually many benefits to having limited credit. For one, it can help you build a good relationship with your creditors. If you are always able to make your payments on time and in full, you will develop a good reputation with your creditors.

This can help you get better terms in the future, as well as access to more credit products. Additionally, having limited credit can actually help you manage your finances better. When you only have a few account to keep track of, it is easier to stay organized and on top of your payments. This can help you avoid late fees and save money in the long run. So while limited credit may seem like a negative at first, there are actually many positives to be found.

Read more: How to write off business debt

Get free advice on restarting your company today

If you’ve come to the conclusion that closing your company with debts and starting again is the best course of action, your next step should be to hire an insolvency specialist. They will be able to advise you on the best route to take, as each has its own advantages and disadvantages depending on your company’s situation.

We can asset you in the process if getting your commercial debt written off, you can then build a new business while taking previous lessons learned from your former business into account. Ultimately, hiring an insolvency specialist is the best way to ensure that you’re taking the right steps to close your company in the most efficient and effective manner possible.

The first step in closing down your limited company is to contact us on the above number or simply complete the online enquiry form, one of our insolvency specialists will take note of the debt and give you the option you need to start again.

Insolvency & Restructuring Expert at Business Insolvency Helpline | + posts

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.