LIMITED COMPANY DEBTS: What happens if a limited company is unable to pay its debts?
The ‘creditors‘ are the people or the organisations owed the money.
They can apply to the court to liquidate a limited company (get it ‘wound up‘).
Creditors can try to get their debts paid using one of two methods:
- They can apply to get a court judgment.
- They can make an official request for payment (a ‘statutory demand‘).
Note: A limited company in debt is a serious situation. You should seek professional advice from an insolvency practitioner or a solicitor.
How to Respond to a Court Judgment
The law permits a limited company 14 days to respond if it gets a court judgment. But, there are several ways to respond. One of the following responses must occur:
- You can pay the debt in full (case closed).
- You can challenge the court judgment.
- You can place your company into administration.
- You can make an application to the court and liquidate the company yourself.
- Come to an agreement with the creditor to pay off the debt in the future (e.g. using a Company Voluntary Arrangement).
There are consequences of failing to respond to a court judgment within 14 days. It means the creditors can apply to have the company assets seized by a bailiff or a sheriff.
The creditors can also apply to wind up the limited company if the assets value does not cover the debts.
How to Respond to a Statutory Demand
You must respond to a statutory demand within 21 days by either:
- Paying the debt.
- Reaching an agreement with the creditor to pay off the debt in the future.
- Putting a company into administration.
- Applying to wind up your company yourself.
Note: Creditors can apply to have a company wound up if it fails to respond to a statutory demand within 21 days.
Stop Creditors applying to Wind Up a Company
There is a way to stop your creditors applying to wind up your company. You must apply to the court to ‘restrain‘ or stop the application. This must take place within 21 days of receiving the statutory demand.
Download form IAA titled ‘Insolvency act application notice‘ and fill it in. The court you send it to depends on how much money shareholders paid into the company. This process of by buying shares is also called the ‘paid up share capital’.
Check the Companies House register to get information about a company paid up share capital.
Paid-up Share Capital Less than £120,000
If the capital is under £120,000 you will need to search for your nearest court that deals with bankruptcy.
Paid-up Share Capital £120,000 (or more)
A limited company paid-up share capital of £120,000 or more means you must apply to the High Court.
The High Court
7 Rolls Buildings
London EC4A 1NL
Receiving a Winding Up Order
The creditors can make a ‘winding-up petition‘ by application to the court to close down a company. But, they can also withdraw the winding-up petition. Paying the debt or making an arrangement to pay it usually meets the criteria for a withdrawal.
Attending a Court Hearing
The court will set a date for a hearing if they accept the petition. You must attend it. The creditors will announce the hearing date and venue in The Gazette and in advance.
The limited company can get placed into ‘provisional liquidation‘. This means someone else will take the over the duties of running a business until the hearing goes ahead.
Court Decision on Limited Company Debts
The court issues a winding-up order if they decide the company cannot pay its debts. An officer of the court – called the ‘official receiver‘ – takes charge of winding-up the company.
You must co-operate with the official receiver during this part of the process. Once the winding-up order gets issued:
- The company bank account gets frozen (in most cases).
- The official receiver will sell off any company assets or property.
Part of the company may get bought with the intention of discontinuing the business. If this happens and it is not run as a ‘going concern‘ the employees will lose their jobs.
Note: Failing to meet your responsibilities can result in a company director disqualification for up to 15 years.
Canceling a Winding Up Order
You can make an application to cancel a winding up order if you believe you do not need to pay the creditors. But, you must apply within 5 working days of receiving the order.