The Potential Risks Associated with Dissolving a Company

In recent years there have been an increasing number of company directors asking the question ‘why should I pay to liquidate my company when I can wait to dissolve it for free?’ And it’s a question they’re right to ask.

Part 31 of the Companies Act 2006 allows a director, secretary or a company adviser to dissolve a company by applying to be struck off the Companies House register. This can be done if:

• Directors wish to retire and there is no one to take over the running of the company;
• The company is a subsidiary whose name is no longer needed;
• The company is dormant and no longer trading;
• The company was originally set up to exploit an idea that turned out not to be feasible.

However, it’s important to note that company dissolution or ‘striking off’ is not an alternative to formal insolvency proceedings where these are appropriate. As a result, there are incidences where company dissolution could actually be dangerous for a company. For instance, even if the company is struck off and dissolved, creditors can apply for the company to be restored to the register if they are not paid the money they are owed.

Dissolving a company

The options available for closing a company depend on whether it is solvent or insolvent i.e. whether it can pay its bills. If the company is solvent you can:

Apply to be struck off the Register of Companies; or
• Start a Members’ voluntary liquidation.

In this case, striking off the company will be the cheapest way to close it down.

If the company is insolvent, you will have to use the creditors’ voluntary liquidation process to close it down, otherwise you risk being forced into compulsory liquidation by your creditors. In this case, closing a company down by a creditors’ voluntary liquidation can be advantageous because the directors are less likely to face an investigation and be accused of acting improperly.

The dangers of dissolution

Clearly, most companies would rather not pay the fees of an insolvency practitioner if they can dissolve the business themselves. However, depending on the circumstances the company finds itself in, the dangers of dissolution could outweigh the additional cost of professional assistance. For this reason, it is essential all the potential implications of dissolving a company are considered.

• Bona Vacantia and unlawful dividends

In some instances, the directors want to dissolve a solvent company to cease trading, pay creditors and make a distribution to shareholders. In this case, dissolution is certainly an option; however, the directors need to be aware that from the date of dissolution all assets belong to the crown as ‘Bona Vacantia’, including the potential rights of action against shareholders for unlawful dividends. This means that if a distribution is made to shareholders, it must be done in accordance with the legislation or it could give rise to a claim for unlawful dividends.

• Close company accounts and sell all assets

From the date of dissolution, the company’s bank account will be frozen and any credit balance in the account will pass to the Crown. Company directors must be sure to close down accounts and sell any assets before applying to dissolve the company.

• Notify and repay all creditors

There’s also the danger that a creditor may not receive notification of the dissolution and subsequently might not be paid. If you are dissolving a solvent company, you must inform all creditors and members before applying as they may object to the company being struck off. It’s also essential you close down the company’s bank account or deal with the transfer of any domain names before you apply.

If an aggrieved creditor is not informed of the dissolution and has a debt outstanding, they can apply to restore the company to the Register of Companies within 6 years of dissolution. Once restored to the register, the company can be subject to formal insolvency proceedings and the directors and shareholders will be held accountable for their actions.

How can we help?

Looking for the safest way to dissolve your limited company? At Jameson, Smith & Co., we can help you find the safest and most cost effective way to close a solvent or insolvent company. Please call 08000 746 757, email: info@companydebt.com or use our live support feature for an obligation and cost-free discussion with an adviser.

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