Understanding Lawyer-Managed Company Closure: Can Personal Debts to the Director Be Cancelled?
If you are a director of a limited company and are considering closing your business, you may encounter situations where the company owes you money personally. This is not uncommon, especially in small or dormant companies where owners often make interest-free loans to cover expenses like accountancy or website fees.
In such cases, questions frequently arise about the legal and procedural implications of cancelling or writing off these debts during the company closure process. Specifically, can the director simply declare that the debt is cancelled, especially if the company no longer engages in trade or generates income?
Scenario Overview
- The company is a Ltd (Limited) entity with only the director as its sole officer.
- The business is inactive or “dead,” with minimal annual turnover—around £50.
- The company has no outstanding liabilities to the tax authorities or other creditors.
- The only debts are interest-free loans made by the director to the company over the years, intended to cover expenses like accounting and website fees.
- The director does not seek to recover these loans; rather, they wish to close the company permanently.
- There is no expectation of repaying these loans, given the company’s current financial state, and the company has no taxable profits.
Legal Considerations for Writing Off Director Loans
- Treating the Debts as Director’s Write-Off
When a limited company owes money to its director, and the director decides to forgo repayment, this is generally treated as a capital contribution or a form of capital reduction. The process involves formalities to ensure proper accounting and legal compliance.
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Procedures for Dissolving a Dormant or Non-Operational Company
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Striking off (Dissolution): If the company has no trading activity and no liabilities (except those owed to the director), the simplest route may be to apply for voluntary strike-off with Companies House. This process is straightforward and cost-effective.
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Members’ Voluntary Liquidation: If there are assets or liabilities to settle, or if the company has active creditors, a more formal liquidation process may be necessary. However, in your case, with negligible assets and no liabilities beyond the director loans, strike-off may suffice.
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Writer-Off of Loans in Dissolution
When applying for strike-off, any debts owed to the company are extinguished upon dissolution. Conversely, debts owed by the company to the
