What Happens to Debts Once a Company is Dissolved?
If a company is solvent then there are two ways it can be wound up. As a company director, you can either:
- Apply for it to be struck off the Companies House Register; or
- Enter into a Members’ Voluntary Liquidation (MVL).
Both of these methods can be used to dissolve a company as long as the debts are settled first. If a business is dissolved without paying its debts then the creditors can apply for it to be restored and take enforcement action against it.
What happens to debts in a Members’ Voluntary Liquidation?
A Members’ Voluntary Liquidation (MVL) is a process that’s only available to the directors of solvent businesses. If a company has debts it cannot afford to pay then it must closed using a Creditors’ Voluntary Liquidation (CVL), which prioritises the interests of its creditors.
However, it’s not uncommon for the directors of a solvent business to want to close a company that does have some debts. They can do that using an MVL. In this process, an insolvency practitioner must be appointed to administer the liquidation. They will sell the company’s assets, pay off any debts and the company will be dissolved.
What happens to debts when striking the business off?
The process of striking a business off the Companies House Register can be an attractive way of winding up a limited company. That’s because there are no liquidation costs to pay or investigations into your conduct as a company director.
A business can be struck off the Companies House Register if:
- The company is a subsidiary which is no longer needed
- The directors want to retire and there is no one to take over
- The company is dormant or no longer trading
- The company was set up to capitalise on an idea that is no longer feasible
The first step in the process is to make sure that all assets have either been sold or transferred out of the company’s ownership, as once dissolved, any remaining assets pass to the Crown. All debts must also be repaid for the following reasons:
- The creditors can object to the striking off application – If the company does have outstanding debts then the creditors must be informed of the director’s intention to have it struck off. If a creditor objects to the dissolution then it may not be allowed and the debt will have to be repaid.
- The company can be restored – If a company with outstanding debts is dissolved using the strike off procedure then creditors can apply to have the company restored at any point over the next 20 years. Once it has been restored, they can then take enforcement action against the business for repayment of the debt.
A company cannot be dissolved to avoid paying its debts
If your company has debts, you might think having it struck off the Companies House Register is an easy way to avoid repayment. It’s not. Every penny must be repaid before the company can be dissolved. That includes all the creditors and any director’s loans.
If the company has debts it cannot afford to repay then a Creditors’ Voluntary Liquidation (CVL) will usually be the best bet. However, if the business does not have assets that can be sold to repay the debts and it cannot afford to pay the liquidator’s fee, an administrative dissolution could be the best option. In that instance, an insolvency specialist is appointed to help the director settle any outstanding debts before the company is struck off the Companies House Register.
Not sure how to close your business?
Whatever your circumstances, we can help you close your business in the most cost-effective way while protecting your interests throughout. Get in touch for a free, no-obligation consultation with one of our team.