Does your company have debts? Are you considering dissolving an insolvent company at Companies House? Be careful, such an attempt can land you directly in prison. Before taking any actions, it’s best to consult a professional advisor.
When is your company insolvent?
You may think that, as the person who runs the business, you’re in the best position to know when your company can be considered insolvent. But your personal feelings don’t matter. The law sets out specific criteria for determining whether your company is insolvent. According to these criteria, an insolvent company is one that
- Is unable to pay its debts as they fall due or will be unable to do so in the near future (the cash flow test),
- has liabilities in excess of assets (the balance sheet test).
How to close an LTD company?
There are a number of ways to close a limited company, including
- Members’ Voluntary Liquidation (liquidation by decision of the shareholders)
- Creditors’ Voluntary Liquidation (voluntary liquidation initiated by creditors),
- Compulsory Liquidation (court-ordered liquidation on behalf of creditors),
- Strike Off (dissolution of the company).
However, not every option will be available in every case. Much depends on your company’s financial position.
For example, in the event of a strike off, your company must be solvent. You also need to prepare for this process in advance. The company cannot have changed its name or sold shares in the last 3 months. If you can’t meet these conditions, you’ll have to choose another option.
Voluntary liquidation by members, another option that doesn’t involve the courts, is also reserved for solvent companies. The conclusion is simple – an insolvent company cannot be wound up by either of these methods.
Insolvent company in the UK – what are your duties as a director?
If your company becomes insolvent, your primary responsibility is to ensure the situation doesn’t worsen. Moreover, you must prioritize the interests of creditors over shareholders.
This means that you cannot take any action that would disadvantage creditors – for example, by increasing your debts or depleting the company’s assets.
Why is dissolving an insolvent company at Companies House not possible?
You now know that it is not possible to wind up a financially distressed company. In 99% of cases, if a director tries to wind up an insolvent company, Companies House will receive an objection from a creditor (banks, HMRC, trade creditors etc) and suspend the application. However, 99% is not the same as 100%, so there are exceptions.
But don’t count on Companies House or your creditors to notice. The director of a takeaway pizza company in Manchester was sentenced to two years in prison for fraudulently applying for a Bounce Back Loan and winding up the company.
Simply having a Bounce Back Loan alongside debt is not fraud. However, as you now know from the previous sections, you cannot use MLV or Strike Off if your company is in debt. This is a criminal offence for which directors can be prosecuted and even imprisoned.
If your company is insolvent, you will have to go through insolvency proceedings. The closure of an insolvent company should therefore follow procedures such as CVL (Creditors’ Voluntary Liquidation).
What can you do if your UK company is insolvent?
Before making any decisions regarding an insolvent company, you must consult a licensed insolvency practitioner. As the name suggests, this is someone who will advise you on what action to take and what is best for your business.
If your business is in financial difficulty, don’t act on your own and, above all, don’t rely on administrative oversight. Instead, seek professional help to ensure that you follow the correct legal procedures and make decisions that are as beneficial to you and your business as possible.
