Can I close an insolvent company in Scotland?

The first step for any director in this situation is to understand whether their company is actually insolvent or whether it is just going through a challenging period.

There are two main tests which can be used to determine whether a company is insolvent: the cash flow test and the balance sheet test.

• Cash flow test for insolvency – If a company is unable to pay its liabilities (such as debts, bills, and other overheads) as and when they fall due, the company can be said to be cash flow insolvent.
• Balance sheet test for insolvency – If a company’s debts are greater than its assets, the company is balance sheet insolvent.

If the company fails either of these tests, you should assume your company is insolvent and seek expert insolvency advice as a matter of urgency.

Once you become aware that your company is insolvent, you have a legal obligation to seek professional insolvency advice in order to protect your company’s creditors. When a company is insolvent, its directors have a legal responsibility to prioritise the interests of its creditors above those of the company’s directors and shareholders.

In practice, this may mean the company must cease trading immediately.

If your company is insolvent and there is no realistic possibility of turning around its fortunes, it is likely that the company will need to be closed down.

In cases of insolvency, closure is achieved by placing the company into a formal liquidation process known as a Creditors’ Voluntary Liquidation (CVL).

You will need to appoint a licensed insolvency practitioner to act as the liquidator of the insolvent company. They will assume full control of the company at this point and your powers as directors will end.

An insolvent company can only enter into a CVL under the guidance of a licensed insolvency practitioner who will work to realise the company’s assets and use these to repay outstanding creditors as far as possible.

Once this has been done, the company will then be wound up and its name removed from the register held at Companies House. The company will then cease to exist as a legal entity and all debts remaining at this stage (unless personally guaranteed) will be written off.

As part of the liquidation process, the appointed insolvency practitioner will conduct an investigation into the affairs of the company’s directors during the time leading up to the company becoming insolvent.

As long as no wrongful or fraudulent trading is discovered, the insolvent company’s directors will be free to move on to a new venture. This may be by taking up employment, or by setting up business again and incorporating a new limited company.

While directors are able to set up a new business, caution must be exercised when it comes to naming the new limited company. There are strict rules surrounding the re-use of a company’s name once it has been liquidated. If you are planning on incorporating a new business following liquidation, you should speak with your appointed insolvency practitioner about your plans as they will be able to ensure you remain compliant when naming your new entity.

If your company is insolvent and you are looking at ways of closing it down, contact the experts at Scotland Liquidators.

Our licensed insolvency practitioners can provide the help and advice you need during times of insolvency, ensuring you adhere to your legal duties as the director of an insolvent company and protecting your creditors as far as possible. Contact our team today.