Business Continuity Plan

How to Close an Insolvent Company with Debts and No Assets

When an insolvent company is liquidated and closed down, its assets are sold to raise the necessary funds to pay back the company’s creditors. Whilst not every creditor is likely to get their money back, most priority creditors are successful.

There are two forms of insolvency procedure for a company with debts and assets – a Creditors’ Voluntary Liquidation (CVL) or a compulsory liquidation. However, for a company with debts and no assets, it’s a slightly different situation. Liquidating a company costs money but if there are no assets and only debt, how do you close an insolvent company with debts and no assets?

The cost of closing an insolvent company

Firstly, whether the company is solvent, i.e. no debt, or insolvent, any liquidation or insolvency process must be managed by a licensed insolvency practitioner (IP); that’s the first cost that has to be paid.

There are also the costs of paying any outstanding monies to HMRC, such as PAYE and corporation tax. Any loans have to be paid back to the banks, any redundancy costs must be paid, priority creditors need to be paid and any outstanding rents must also be settled.

On average, it costs between £4,000 and £6,000 to liquidate an insolvent company that has few creditors, not too many assets and no other complications. With a compulsory liquidation process, the liquidation fees are the responsibility of the creditor petitioning the court for a winding up order. In the case of a voluntary liquidation process, the company’s assets pay for the liquidation fees.

Closing an insolvent company with debts and no assets

If an insolvent company does not have any assets to sell and raise funds to pay for the liquidation process, it is not possible to actually liquidate the company. The only option is to enter an Administrative Dissolution process that clears the company’s debts and means the company can be closed.

The process of Administrative Dissolution is devolved from Sections 1003 to 1008 of the Companies Act 2006 which details that creditors must be informed of the business’s insolvent position. The IP managing the insolvency procedure also invites the company’s creditors to petition the courts for a winding up order, thereby transferring the costs to the creditors.

One of the benefits of Administrative Dissolution is that as a director of the company, you have adhered to your statutory duties by informing your creditors, and the Registrar of Companies. However, it is essential that the process is conducted correctly and the right paperwork is completed and your conduct as a director of the company is still investigated.

Dissolving an insolvent company

Administrative dissolution, also known as voluntary dissolution, allows a company to be removed from the Companies Register but only when the following conditions apply:

● The business ceased trading for at least three months.
● There are no assets or cash in the bank, nor any property.
● The creditors and the Registrar of Companies have been informed of the company’s financial position and requested permission to dissolve the company.
● The creditors have been granted three months in which to consider dissolution and given the opportunity to petition the court for a winding up order, if they reject dissolution.
● The name of the company has not changed during this period.
● No disposal of assets or property has taken place.

If a formal insolvency process has commenced, such as a CVL or compulsory liquidation, a voluntary agreement, receivership or administration, or a winding up petition has been issued by the court, it is not possible to dissolve the company.

Any secured creditors are entitled to repossess the relevant asset on which the company took the loan but as there are no further assets, any unsecured creditors will not be paid back.

In some cases, when closing an insolvent company with debts and no assets, the directors may be able to claim redundancy if they were an employee of the company with a formal contract of employment. Currently, the average director redundancy claim in the UK is around £9,000 which would go towards paying liquidation fees or any personal guarantees.

The steps to administrative dissolution are:

● Cease trading immediately, if you have not already done so.
● Once the business has been inactive for a minimum of three months, the directors of the insolvent company complete the application form DS01 which applies to strike off the company from Companies House. You will need to pay a fee of £10 by cheque.
● Consistently check the Companies House register until you see your company’s status change to ‘dissolved’. Once this happens, your application to dissolve your company has been accepted and your business is closed.

Advantages of administrative dissolution

● It avoids the costs, fees and expenses associated with a liquidation process.
● It is a quick and easy way to close an insolvent company that doesn’t have any assets.
● Once the company has ceased trading for at least three months, the directors’ conduct is not investigated as they are in a formal liquidation process.

Disadvantages of administrative dissolution

● Creditors are entitled to reject the request to dissolve the company and issue a winding up order via the courts, i.e. compulsory liquidation.
● A creditor, shareholder or liquidator is entitled to revive the company as long as it is 20 years after it has been dissolved. However, this can only happen under certain circumstances.
● Any HP agreements, leases or contingent liabilities do not cease after dissolution.
● While there is no formal investigation of directors’ conduct by the IP, if the creditors of the company believe there has been wrongful trading or fraud has been committed, they can refuse the dissolution application and the company will be liquidated.

Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt or are considering winding up a solvent company, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.