There are some very clear legal mechanisms to deal with debt you cannot pay, but dissolution is not one of them.
Many directors consider dissolving a company with debt as a means of avoiding liquidation costs.
This article will explain what will happen if you attempt to strike off your company off the Register of Companies at Companies House without having dealt appropriately with business creditors.
We will also outline the correct methods of addressing your debt and winding up your company.
What Happens To Creditors Owed Money by a Dissolved Company?
Even if the company were to be successfully dissolved, creditors have the right to apply for company restoration where necessary.
For a period of up to 20 years, any creditor has the right to commence legal action to have the company reinstated, and then forced into compulsory liquidation.
Read more about the Process of restoring a company name to the Register of Companies
Where HMRC debts are involved the line as to when legal action can be taken is not as clear cut. HMRC has the right to make a claim on even a deceased estate for unpaid taxes, without time limit. In addition any interest and penalties can be back dated to the date of striking off.
Objections to Company Strike Off due to Existing Debt
Usually, a company doesn’t even get to complete the dissolution before an objection is made.
Where a director applies to Companies House to strike their company off the register, without having dealt properly with debts, it is likely that creditors (commonly HM Revenue and Customs (HMRC) will lodge an objection to the strike off.
You have a legal responsibility to inform interested parties about your decision to strike off. Since the attempt will be advertised in the Gazette, it will become public knowledge anyway.
Anyone connected to the business has the legal right to object – this includes:
It is also worth noting that Companies House notifies HMRC automatically of any application to strike off. HMRC in the past has reciprocated by automatically objecting to the striking off application if it has not been notified of the strike off.
Attempting to Dissolve with Pre-existing Legal Actions in Place
You cannot dissolve a company if threatened with insolvent liquidation such as a winding up petition. Ignoring this can lead to prosecution and or a fine.
Where a company attempts to dissolve without having addressed existing legal threats, remember you must write to them as part of the application to strike off.
Where a company attempts to dissolve without having addressed existing legal threats, your company will likely be forced into compulsory liquidation by the court. This will put you in a trickier situation than having chosen voluntary liquidation, because the proceedings will be carried out by a court or creditor-appointed insolvency practitioner, rather than your own.
You may also be held personally liable as a director for not putting the interests of the creditors first. This could involve being held responsible for some or all of the corporate debts, additional financial penalties, and even prison in the most serious instances.
How to Dissolve a Limited Company with Debts
The correct means of doing this is via what is called Creditors Voluntary Liquidation, which means the board of directors seeks out the services of an insolvency practitioner, with the understanding that the company needs to be liquidated, the assets sold to repay creditors, and the company dissolved.
Usually, the costs of this process are taken from the sale of the assets and, due to the nature of the corporate structure, the directors are protected from personal liability – this is assuming no personal guarantees have been signed, and no wrongful or fraudulent trading.
Any proceeds generated from the sale of the company assets will be paid to creditors in order of priority. Remaining debts will be dissolved.
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.