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Can you liquidate a limited company with debts?

If your company is facing insolvency, you may be wondering if voluntary liquidation is a possibility. Be aware that if you do not act quickly a secured or unsecured creditor could take the future of the company out of your control by petitioning for the compulsory winding up of your business.

Let us examine your options as a director if you are thinking of liquidating your company voluntarily.

There are two ways to voluntarily liquidate a company:

  • Members’ Voluntary Liquidation
  • Creditors’ Voluntary Liquidation

The most important point about Members’ Voluntary Liquidation (MVL) is that it is only available to companies that are solvent. Even if you have numerous debts, if you are able to meet them as they fall due and the value of your assets exceeds the total liabilities held by your company, it could still be regarded as solvent.

Insolvency can be established using two tests – the cash flow test and the balance sheet test. It is advisable to seek the services of an Insolvency Practitioner to ensure the accuracy of figures used in these calculations. Professional input would also provide confidence that you are taking the correct route.

If the company is found to be solvent, a Members’ Voluntary Liquidation may be appropriate, particularly if you have in excess of £25,000 in cash or assets to extract from the company. If the company is insolvent, however, you would need to look at the possibility of a Creditors’ Voluntary Liquidation (CVL) instead.

Begbies Traynor offer a same-day consultation free of charge. This is invaluable if you are under threat of legal action and need to move quickly.

Members’ Voluntary Liquidation

Once solvency is established, a sworn declaration to this effect must be provided ahead of the liquidation process. Shareholders or members meet to pass a resolution to wind up the company, after which an Insolvency Practitioner is appointed to undertake the sale of assets.

Money realised from the sale is used to repay any creditors while the remaining funds are distributed among shareholders. The company is then closed and directors are free to move on without any loss of reputation.

Creditors’ Voluntary Liquidation

This is the process by which an insolvent company is liquidated once creditor pressure becomes too much to deal with and the directors realise there is very little possibility of the company being able to recover financially.

At the start of the process, a resolution is passed to wind up the company. This has to be voted in favour by a minimum of 75% (by value) of shareholders. A creditors’ meeting follows, at which a full explanation of the company’s financial position is provided by the directors and appointed Insolvency Practitioner.

Begbies Traynor can assist in this role. We are the UK’s number one corporate recovery firm with over 70 licensed insolvency practitioners up and down the country.

Once the liquidation process is complete and creditors paid as far as possible, any debts remaining are written off as long as these have not been secured with a personal guarantee.

Although liquidation may not appear to be a positive step, if the company is under relentless pressure from creditors and has been threatened with legal action, voluntary liquidation by way of a CVL can be the best option for a struggling company. 

Is a director liable for company debts after liquidation?

Many directors ask us about personal liability for company debts, and if money outstanding will be written off once the business has been liquidated. The answer is that once assets have been liquidated and the company has been closed, in most cases directors hold no personal liability unless:

a) They have given personal guarantees to a creditor, in which case they will need to find the money to repay the debt should this remain outstanding following the liquidation.
b) They are found guilty of unlawful trading or improper conduct as a director following an investigation by the Insolvency Service 

We provide immediate help and advice to directors and shareholders of limited companies experiencing financial difficulties and offer free same-day consultations from any of our 70+ offices located across the country.

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We are accredited by the following industry leading organisations

Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland

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