Closing a limited company has many intricacies, with directors having to make numerous decisions before the closure is finalised and the company ceases to exist. With all these decisions, directors can sometimes overlook aspects of closing that might seem insignificant but can cause trouble later if forgotten.
If you’re a director of a limited company that cannot repay its liabilities as and when they fall due, speaking to a licensed insolvency practitioner as soon as you become aware of the issues can help you manage the situation and guide your company towards the most suitable solution.
So, what are some often-forgotten aspects of closing a limited company?
Employee Rights and Redundancy Payments
Directors should understand their obligations to employees when closing a company. This includes providing adequate notice, paying any outstanding wages or holiday pay, and making redundancy payments where necessary.
Directors must comply with the relevant employment laws around redundancy, make payments accordingly, and conduct the employee consultation process with sensitivity.
Tax Liabilities and Obligations
Before closing, directors must ensure all taxes owed to HMRC are repaid, and the final accounts submitted.
If the company is insolvent, it may owe taxes to HMRC. These taxes may include outstanding corporation tax, VAT, PAYE, and National Insurance contributions. In this case, directors should take insolvency advice immediately. HMRC will likely pursue the company for the unpaid amount, and may even attempt to wind-up the company and force it into compulsory liquidation.
Intellectual Property
Any intellectual property the company owns, such as trademarks, patents, designs, web domains, client databases, etc., must be dealt with before the company’s closure.
In insolvency, intellectual property rights may be protected to maximise the potential return to creditors. The assets may, at some stage, be independently valued and sold, with the proceeds contributing towards the repayments.
Franchise Agreements
If the company has a franchise agreement or operates as part of a chain using a franchisor’s branding, there are extra considerations, potentially including rent arrears or unpaid license fees. If a franchisee enters liquidation, they should consult their franchise agreement. This contract should detail any obligations that they must honour in the event of closure or premature termination.
Leasing Contracts
If the company leases any property, directors should review the agreement’s terms and pay attention to anything potentially buried in the small print. This advice could extend beyond property and premises and include lease agreements involving vehicles or equipment.
Director’s Personal Liability
Limited companies come with limited liability protection, wherein a director’s personal finances are separate from the company’s if the company is insolvent. However, in some cases, directors can be held personally liable for their company’s debts. These could include instances where the directors have signed personal guarantees, if the company has an unpaid director’s loan account, or the company has traded whilst insolvent.
Directors should take professional insolvency advice to understand the risks around their potential personal liability.
Unpaid Bounce Back Loans
Bounce Back Loans helped companies survive the COVID pandemic lockdowns, and many companies are now repaying these loans without issue. If a company has an unpaid Bounce Back Loan when it enters an insolvent liquidation, it becomes an unsecured debt.
As the loans didn’t require personal guarantees, directors aren’t personally liable unless the loan was misused. Bounce Back Loan misuse can apply if the loan is used to increase salaries, pay dividends, take a director’s loan account, fund a personal lifestyle, or repay personal debts.
To Conclude
As closing a limited company can be complicated, directors may forget or overlook many aspects of the process. If a director becomes aware that their company is insolvent, they should take professional advice from a licensed insolvency practitioner. They can guide them towards the solution best suited to their situation.
Entering liquidation, directors must ensure they’re familiar with their employees’ rights and the laws around redundancy payments if necessary. They should be up to date on the company’s tax liabilities and obligations, and be aware of any implications surrounding intellectual property, leasing agreements, and franchise agreements, if applicable.
While limited liability protection protects directors from personal liability in insolvency, directors should consider whether their actions have compromised this protection. If the company has an unpaid Bounce Back Loan, directors must ensure it has been used for its intended purposes and doesn’t have negative consequences later.