What are the closure options for an insolvent limited company?
When a company is insolvent, action must be taken to resolve the situation as a matter of urgency. Simply put, a company should exercise caution if it continues to operate while insolvent, unless this is part of a formal restructuring plan overseen by a licensed insolvency practitioner.
Trading while knowingly insolvent is a breach of a director’s legal duties and the consequences of this can be severe. Therefore, once a company becomes insolvent, its directors should consider taking expert advice from a licensed insolvency practitioner to understand their options going forward. In some cases, the company may be able to be rescued through financial and/or operational restructuring.
In other cases, however, the company’s problems may have taken it beyond the point of rescue meaning there is no option but for the business to be brought to an end and placed into liquidation.
Closing an insolvent company via liquidation
For an insolvent company, liquidation can be entered into via two routes: a Creditors’ Voluntary Liquidation (CVL) or Compulsory Liquidation. While both of these processes ultimately achieve the same result – the closure of the company – the way in which each is entered into is quite different.
As the name suggests, a Creditors’ Voluntary Liquidation is a voluntary process initiated by an insolvent company’s directors once they realise their company’s financial problems have become so severe that the company needs to be closed down. Compulsory Liquidation, however, is forced upon a company by order of the court following a creditor presenting a winding up petition due to persistent unpaid debts.
Directors are able to select an insolvency practitioner of their choice to act as liquidator of the company during a CVL; however, when it comes to compulsory liquidation, the courts will be responsible for appointing an official receiver to oversee the process.
It must be remembered that a director of a company has a legal duty to prioritise the interests of its creditors once it becomes clear that the company will not be able to realistically avoid insolvent liquidation. Voluntarily entering into liquidation - and therefore minimising any further creditor losses – rather than allowing the situation to deteriorate even further, demonstrates a desire and a commitment to comply with these obligations.
Can an insolvent company be closed using the strike off process?
As an alternative to formal liquidation, some companies may be able to be closed using the strike off process; this is also known as dissolution. For a company with no assets and no liabilities, strike off represents a quick and affordable way to close down a limited company which is no longer needed or wanted. Although designed for solvent companies or those that have never traded, many directors are keen to utilise this option even if their company is technically insolvent.
Applying to have an insolvent company struck off using this method, however, is unlikely to be successful. This is because once a company is struck off it ceases to exist as a legal entity and therefore any debts which remain outstanding will be written off and be deemed as uncollectable. It is therefore in a creditor’s interest to ensure the company remains active so that they can continue to chase the company for the money it owes.
Once you submit an application for strike off, a notice is placed in the Gazette informing any interested parties of your intention to wind up the business. If your business has outstanding creditors, you should be prepared for an objection to be filed against your application.
What to do if your company is insolvent
If your company is insolvent, or you believe it is on the road to soon becoming insolvent, and you see no realistic way of being able to turn the situation around, you may need to consider options for bringing the company to an orderly end.
A licensed insolvency practitioner will be able to take an objective overview of your company and help you understand the position it is currently in. They will be able to talk you through your options and guide you towards the one most appropriate for your circumstances. If closure is indeed the only viable solution, a plan can be put in place to wind the company down in an orderly manner which is in full accordance with the Insolvency Act 1986.
Shaun Barton is a partner at Company Closure and boasts a wealth of experience in helping directors of distressed companies understand their options. A director-facing adviser, Shaun is often the first point of contact for business owners in financial distress, consistently delivering expert advice when it is needed the most.
