Limited companies

 April 2017

Fact sheet no. BDL07 SCOT Limited companies

This fact sheet tells you about what you can do if your limited company has debts that it is struggling to pay. It outlines the options available step-by-step and explains other important things to think about when running a limited company.

Use this fact sheet to:

  • find out when you may be personally liable for your limited company’s debts;
  • understand what kinds of behaviour may be considered offences; and
  • find out what options are available for dealing with your limited company’s debts.

This fact sheet includes:

  • a sample letter that you can use if you are considering strike off (a special process to close your business);
  • a sample budget for limited companies; and
  • some useful contacts and links for you to get further help.

The sample letter mentioned in this fact sheet can be filled in on our website.

Identifying a limited company

Under the law, a limited company is a separate entity from its directors and shareholders. In a small company, the directors are often the shareholders. A company may have one sole director and in some cases it will also have a secretary.

A limited company must be registered at Companies House. It must also have been granted a 'certificate of incorporation', have a ‘memorandum of association’ and ‘articles of association’. These are important documents that each limited company must have.

The limited company must send a confirmation statement to Companies House each year. This has replaced the annual return for periods ending on or after 30 June 2016. See www.gov.uk and search for 'confirmation statement' for further guidance.

Liability for limited company debts

In most situations, the director and shareholders are not liable for the limited company’s debts. However, there are some circumstances where they may be liable. These are listed below.

  • Personal guarantees. If a limited company applies for credit (often from a bank or supplier), the director may be asked to give a personal guarantee. In this situation, the director is known as the ‘guarantor’. The personal guarantee is a signed agreement stating that if the company becomes unable to pay the debt, the director can be held personally liable. Personal guarantees can be unsecured, or secured against property or land belonging to the guarantor. If the personal guarantee is secured, the property or land will be at risk of repossession if the guarantor is unable to pay.
  • Warning:

    avoiding personal liability

    If you are applying for credit or signing an agreement for your limited company, make sure that the creditor knows that you are signing for, and on behalf of, the limited company. You may need to have the agreement checked by a solicitor to ensure that you are not signing in your own name. If this is not made clear, you may be at risk of the creditor trying to pursue you personally for any missed or late payments. Also, some creditors may claim that they were unaware they were dealing with a limited company. If this has happened to you, contact us for advice.

  • Director offences. The company goes into formal insolvency proceedings and the director is found guilty of wrongful trading, fraudulent trading, misfeasance or other offences. See Offences later in this fact sheet for more information.
  • Pay as you earn income tax (PAYE). Her Majesty’s Revenue and Customs (HMRC) use this system to collect income tax from someone’s wages at source if they work for an employer. As a director, if your limited company is dissolved (that is, formally closed), you are not generally liable for your own PAYE. However, HMRC can ask you to make an arrangement to repay it. This is because a director is technically an employee of the limited company and HMRC can recover any income tax unpaid by an employer (that is, the limited company) from an employee (you).
  • Director's loan account. If a limited company enters into formal insolvency proceedings and the director’s loan account is in debit (that is, the director owes the company money), then the director can be asked to repay the amount owed.

Information:

Formal insolvency proceedings

‘Formal insolvency proceedings’ is the term used to describe certain legal options that the limited company can take to deal with its debts or to bring the company to an end. A ‘company voluntary arrangement’ is an option designed to deal with company debts. ‘Administration’, ‘creditors’ voluntary liquidation’ and ‘compulsory liquidation’ are options designed to bring the company to an end. We describe each of these options later in the fact sheet.

Offences

As a director of a limited company, it is your ‘fiduciary duty’ to act in the best interests of the company at all times. Fiduciary duty means your legal and moral duty to do the right thing for the company. If you do not do this, it may be viewed as an offence if your company later enters into a formal insolvency option.

In the next four sections we have outlined some of the main offences you need to know about.

Wrongful trading

If you are the director of a limited company, it is your fiduciary duty to recognise when the company is insolvent. 'Insolvent' means that:

  • the company cannot meet its debts as they fall due; or
  • the value of its assets is less than the total debt that it owes; or
  • the company cannot meet its debts as they fall due and has assets worth less than the total that it owes.

You should stop trading when there is no reasonable prospect of the company being able to get out of its current difficulties by continuing to trade. ‘Wrongful trading’ means continuing to trade when the company is insolvent, resulting in the company’s debts increasing.

Fraudulent trading

Warning:

sanctions for offences

If you are the director or officer of a limited company and are found guilty of any of the offences described in the previous four sections, you can be held personally liable for the debts of the company. You could also be fined or disqualified from being a director for a certain length of time. In serious cases, you can be imprisoned.

Fraudulent trading means deliberately trying to defraud creditors or intentionally being part of a fraud taking place. For example, this would include taking money from the company and then deliberately entering incorrect information into company accounts.

Misfeasance

Misfeasance means taking company funds or property for your own gain at the disadvantage of the company’s creditors. An example of this offence is taking a salary from the company to pay your personal debts rather than paying the company’s debts.

Other offences

Other offences can include:

  • deliberately entering incorrect information into limited company records;
  • making false statements about the company; and
  • missing out important information about the company when completing certain forms.

If you are unsure whether a particular action is likely to be viewed as an offence, contact us for advice.

Dealing with limited company debts

If your limited company is struggling to pay its debts, think carefully about whether it can trade through its financial difficulties.To help you do this, complete a business budget sheet showing the company’s income and outgoings.You may need help from your accountant to do this.

When completing the budget, work out the average income for the limited company compared to the outgoings (including salaries). This should usually be done over a period of 3 to 12 months.Your company will also need to budget for corporation tax, PAYE for employees and value added tax (VAT).See the Budget sheet for limited companies at the end of this fact sheet.

Remember:

trading at a loss

Continuing to trade when your company is making a loss could be viewed as wrongful trading.

If there is a monthly profit after all outgoings have been taken into account (that is, a ‘net profit’), think about whether it is possible to make offers to all of the company’s creditors.In the next two sections, we have outlined the options available, depending upon whether or not there is a net monthly profit.

 

Net monthly profit available

Informal negotiations

Use your business budget to show how much money is available and how much the company can afford to offer in instalments to its creditors.

It is important that you identify which of the company’s creditors are considered priority and which are non-priority creditors.

If you are unsure of the type of debt your company has, contact us for advice.

Company voluntary arrangement (CVA)

A CVA is a legally binding agreement between your company and its creditors to pay an agreed amount off the debts over a short period of time. Payments can either be paid as a lump sum or in instalments (usually over three years).

A CVA has to be set up by an insolvency practitioner (IP). They are referred to as the ‘nominee’. An IP is usually an accountant or solicitor who is authorised to set up formal insolvency procedures. There will be high fees involved in setting up a CVA. Shop around to find a reputable IP to act as your nominee. Check the terms and conditions of their services, including their fees, before agreeing to anything. To find a directory of insolvency practitioners, see www.gov.uk.

  • With the help of the nominee, the directors put together a proposal to the company’s creditors.The nominee can make an application to the court for a 28 day ‘moratorium’. This stops any court action being taken against the company whilst the proposal is put together. If the nominee applies for a moratorium, formal notice must be given to the Registrar of Companies at Companies House. Contact us for advice.
  • The nominee sends the CVA proposal to the company’s creditors and arranges a formal meeting called a creditors’ meeting'. The nominee must give the creditors at least 14 days’ notice of this meeting.
  • At the meeting, the creditors will vote on whether or not they accept the CVA. It is possible that not all creditors will attend the meeting, so some votes may be sent in writing or by email.
  • Each creditor is given a vote based on how much money they are owed. Therefore the company’s largest creditors have the largest part of the vote. For example, a creditor who is owed 10% of the company’s total debt holds 10% of the vote. In order for the CVA proposal to be accepted, at least 75% of the votes must agree to its terms. Therefore if your company has a creditor that holds 75% or more of the company’s debt, they have the deciding vote.
  • The nominee will then send a report of the meeting to the Registrar of Companies at Companies House.
  • If the CVA is agreed, all of the company’s creditors are bound by the terms and conditions of the proposal, even if they voted against the CVA.
  • A CVA does not affect the rights of secured creditors or landlords. They could still take possession action for any outstanding arrears.

Warning:

if the CVA is rejected

If the company’s creditors vote against the CVA then things will go back to the same position as they were before the application was made. You will need to negotiate payment arrangements with the creditors separately. Your company may also lose money for the costs and fees of the CVA application.

Information:

applying for a moratorium

If you have applied for a moratorium, you will have to wait for 12 months before you can apply for another one. However, it is not always necessary to apply for a moratorium when applying for a CVA.

No net monthly profit available

If there is no money available you may need to consider reducing your director’s salary. Director’s salaries should be taken based upon what the company can afford to pay and not on what is needed for the director to meet their own costs. If you are unable to meet your personal costs from the salary you are drawing, contact us for advice.

You will need to consider whether the company is insolvent. ‘Insolvent’ means that:

  • your company cannot meet its debts as they fall due; or
  • the value of the company's assets is less than the total debt that it owes; or
  • your company cannot meet its debts as they fall due and has assets worth less than the total that it owes.

A company can also be considered as insolvent if it has received a ‘statutory demand’ and the time limit on it for replying has run out. A statutory demand is a legal document from a creditor demanding that the company pays what it owes them. It has to be sent to your company before the creditor applies to court to wind your business up. See the next section Compulsory liquidation (winding up) for more information.

Ask your accountant for help drawing up a budget sheet of the company’s assets and what it owes (that is, its liabilities). If your company is insolvent, consider the options described in the next four sections.

Compulsory liquidation (winding up)

Compulsory liquidation is where a court order has been made for a company to be made bankrupt (that is, wound up). This can be ordered by the Court of Session or by the sheriff court (if the company’s shares capital is less than £120,000).

A winding-up petition can be made by:

  • the limited company itself, its directors or a shareholder;
  • a receiver, administrator or supervisor;
  • the Secretary of State for Business, Innovation and Skills;
  • the Financial Conduct Authority (FCA); or
  • a creditor.

The most common reason for presenting a winding-up petition is that the company is unable to pay its debts. A company is classed as being unable to pay its debts if:

  • a creditor is owed more than £750 and the limited company has received a statutory demand which has expired;
  • the company can provide a letter stating that it is unable to pay its debts; or
  • the company’s assets are valued at less than its total debt (the court will need to see an assets and liabilities statement).

This is not a complete list of when a company is classed as being unable to pay its debts. Contact us for advice.

Warning:

publicity

The winding-up petition has to be advertised in the Edinburgh Gazette and at least two other local newspapers. This may cause your creditors and customers to become aware of your situation.

What happens when a winding-up petition is issued?

A solicitor normally presents the winding-up petition to the court. The court may then appoint a ‘provisional liquidator’. If the company is still trading, an insolvency practitioner is normally nominated to act as provisional liquidator. They will protect the company assets and check whether the company is able to pay its debts as they fall due.

The court can then either:

  • grant the winding-up order:
  • dismiss the winding-up petition; or
  • adjourn the case (that is, give further time for certain actions to be completed).

If the order is granted, an ‘interim liquidator’ is appointed. The interim liquidator will then:

  • look after the assets of the company until a ‘liquidator’ is appointed;
  • ask for a statement of affairs and further information about the company’s history; and
  • call and prepare information for a creditors’ meeting (the interim liquidator will chair this meeting).

The creditors must be given 14 days’ notice of the meeting. At the meeting, a liquidator and ‘liquidation committee’ are appointed. The liquidator must then write to the creditors within 28 days to report the outcome of the creditors’ meeting.

The liquidator will then investigate the behaviour of the directors and members of the company and send a report to the Department for Business Innovation and Skills (BIS). The company’s assets will be sold. The money raised will be used to cover any fees owed to the liquidator and the amount owed to creditors. The liquidator will then ‘dissolve’ (that is, formally close) the company after a final creditors’ meeting is held.

If the company does not have enough assets to cover the costs, the liquidator can apply to the court for the company to be dissolved early (normally three months after the winding up petition is applied for).

Can the winding up order be prevented?

The company usually has eight days after the service of the petition to ‘lodge answers’ (that is, to write to the court and explain what its defence is). You would need a solicitor to represent you in court for this.

If the order has already been made because you were not aware of the petition, or unable to act in the given time, you may be able to ask the court to make an order staying, or sisting (that is, stopping) winding-up proceedings. You would need legal help and advice to do this. Business Debtline can help you to find legal advice that is right for you. Contact us for advice.

Company voluntary liquidation (CVL)

A company can go into CVL when:

  • the company cannot meet its debts as they fall due; or
  • the value of its assets is less than the total debt that it owes; or
  • the company cannot meet its debts as they fall due and has assets worth less than the total that it owes.

The directors must hold a board meeting and make a formal decision that this is the case. The ‘resolution’ (decision) must then be advertised in the Edinburgh Gazette and sent to the Registrar of Companies and the Accountant in Bankruptcy within 14 days.

Within 14 days of the resolution being passed, a creditors’ meeting must be held. The creditors must be given seven days’ notice of this meeting. The meeting must be advertised in the Edinburgh Gazette and two local newspapers.

Warning:

cooperation with the liquidator

It is important that the directors cooperate fully with the liquidator and hand over all books, records, receipts and statements. They will also need to give the liquidator all the information they need about the company’s assets.

A liquidator is then appointed to wind up the company. The liquidator will be an insolvency practitioner (IP). They can be appointed by either the creditors or members of the company. The company’s assets will be sold and the money raised will be used to pay its debts and the liquidator’s costs. If any money is left, it will be shared between members of the company.

The liquidator will investigate the behaviour of the directors of the company. They will then write a report which will be sent to the Secretary of State for Business, Innovation and Skills.

Receivers

Information:

if receivers are appointed

The appointment of receivers is rare. If a receiver has been appointed to your company, contact us for advice.

A receiver can be appointed by anyone who holds a valid ‘floating charge’ against the assets of the company. A floating charge is a security given to a creditor over any assets that a debtor (for example, a limited company) may hold at any point in time. The receiver can only be appointed if the floating charge was taken before 15 September 2003. A receiver has the power to sell the assets that are secured against the floating charge. If your floating charge was taken after 15 September 2003, contact us for advice.

The receiver only needs to recover the debt owed to the floating charge holder. If there is any money left over, the company would also have to be liquidated for unsecured creditors to be paid.

The receiver will investigate the conduct of the company directors. A report will then be sent to the Secretary of State for Business, Innovation and Skills.

Administration

Information:

preferential creditors

A preferential creditor is one that should be paid before others out of the money raised by the sale of the limited company’s assets and property. Preferential creditors include employees who are owed wages and Her Majesty’s Revenue and Customs (HMRC).

This is where an administrator is appointed to take over the running of the company. They must be an insolvency practitioner and can be appointed by the court or by the company’s directors. The administrator will manage its affairs, business and property for the benefit of the creditors.

The aim of administration is to:

  • make an attempt to rescue the company as a going concern. ‘Going concern’ means that a limited company is trading and intends to continue trading;
  • get the best possible price for either the company or its assets, so that creditors get a better return than if the company were wound up; and
  • value and sell any property owned by the company so that ‘preferential creditors’ can be paid.

Pre-pack administration

A ‘pre-pack administration’ is an arrangement for the sale of the company’s assets, normally to the directors or shareholders, which is agreed before formal insolvency. Formal insolvency will normally follow very soon after the assets are sold. Pre-pack administrations are complicated. Contact us for advice.

Strike off

Strike off is not a formal insolvency procedure. It is the method used to dissolve (that is, formally close) a company if it has no assets and cannot afford to appoint a liquidator or administrator.

Am I eligible for strike off?

Your company will be eligible for strike off if, in the previous three months, it has not:

  • traded or advertised its intention to continue trading (for example, by placing adverts in the local newspaper or online);
  • changed its name; and
  • got rid of any assets in the normal course of its business.

Your company cannot apply for strike off if it is going through:

  • any insolvency proceedings such as liquidation; or
  • a 'section 895 scheme’ under the Companies Act 2006 (that is, a compromise or arrangement between your company and its creditors or members).

If you are unsure whether your company can apply for strike off, contact us for advice.

Preparing for strike off

In order to prepare for strike off, your limited company should stop trading and inform all of its creditors and members, in writing, that it has done this. The creditors and members should also be told that your limited company does not have enough money to enter into formal insolvency proceedings. The letter can also invite any creditors to wind up the company at their own expense. See the Considering strike off sample letter.

Once the company has ceased trading for three months, you can apply for strike off on form DS01. This is available from the Companies House website. Go to www.gov.uk and search for 'Companies House'.

The form should be signed and dated by:

  • the sole director if there is only one;
  • both directors if there are two; and
  • all, or the majority, of the directors if there are more than two.

The form should be sent with the fee of £10 to:

The Registrar of Companies for Scotland, Companies House, 4th Floor Edinburgh Quay 2, 139 Fountainbridge, Edinburgh EH3 9FF.

All cheques should be made payable to ‘Companies House’ with your company number written on the back.
 

Within seven days of sending the form to Companies House, you must send copies to:

  • any other company members (for example, shareholders);
  • all existing and likely creditors (for example, banks, suppliers and so on);
  • the appropriate HMRC offices and the DWP;
  • employees (including former employees if owed money);
  • guarantors;
  • managers or trustees of any employee pension fund; and
  • any directors who have not signed the form.
  • Warning:

    offences

    It is an offence for you to:

    • apply for strike off if your company is not eligible;
    • give false or misleading information on the application;
    • fail to send copies of the application to all relevant parties within seven days; and
    • fail to withdraw the strike off application if the company is no longer eligible.

    Once the form is accepted, the registrar will place a notice on the company’s record stating that a strike off proposal has been made. The proposal is then advertised in the Edinburgh Gazette and an invitation is given for objections to the strike off. If no objections are received within two months of the date of the notice, the company will be dissolved (that is, formally closed). This will then be shown on the Companies House register.

    If objections are made, the strike off will be put on hold. This is usually for six months if HMRC objects and three months for most other creditors. During this period the limited company will not be dissolved. This gives the objector(s) time to take action against the company (for example, by taking county court action or using formal insolvency proceedings at their own cost). If your company has received an objection to its strike off proposal, contact us for advice.

Budget sheet for limited companies

You need to use an average figure over an appropriate period (for example 3, 6 or 12 months).To find your average 'monthly income' to input into the budget, use the example below.

  • Receipts for the last three months = £3,000
  • Divide £3,000 by 3 = £1,000
  • Average monthly amount is £1,000

£ Monthly income =

COSTS ​ ​

FIXED COSTS

​Rent £​

To work out the amount to put aside for corporation tax, do the following.

  • Take away the total costs from the monthly income. Call the figure you get A.
  • Multiply A by 12 to get the annual figure. Call this B.
  • Multiply the first £300,000 of B by 19%. Call the figure you get C.
C =​ ​ ​​
​Business rates ​£
​Business loan ​£
​Insurance ​£

UTILITIES

​Gas £​ ​Next, multiply the amount of B between £300,001 and£1,500,000 by a variable percentage (%).

This is called marginal relief. The % depends on the limited company’s circumstances. See www.gov.uk/government/organisations/hm-revenue-customs or contact us for advice.

  • Call the figure you get D.
D =​ ​
​Electricity ​£
​Water rates ​£
​Telephone ​£

VARIABLE COSTS

Stock purchases £
  • Multiply any amount of B over £1,500,000 by 19%.
  • Call the figure you get E.

E =

Bank charges £
Wages (including PAYE and National Insurance) £
Transport and motor costs £
Stationery £

To get the estimated annual corporation tax, do the following.

  • Add C, D and E together.
  • Call the figure that you get F.

F =

Postage £
Cleaning and repairs £
VAT £
Accountant £
Professional fees £

To get the estimated monthly corporation tax, do the following.

  • Divide F by 12.
  • Call the figure that you get G.
  • Put G in the appropriate box opposite.
Other £
Other £
TOTAL COSTS £
Monthly income minus total costs (A) £
Estimated monthly corporation tax (G) £
Net monthly profit = (A) - (G) £