This article will help you understand the fate of debts after company dissolution, including debt recovery procedures and legal implications.


What Happens to the Debts of a Dissolved Company?

When a limited company is struck off or dissolved without going through formal liquidation, its outstanding debts technically disappear, as the company no longer exists as a legal entity. Debts belong to the company.

However, in cases where creditors believe they have been unfairly treated, they may apply to the court to have the company reinstated to pursue these outstanding debts. Directors have a legal responsibility to inform creditors of the intention to strike-off the company so they can object if necessary.

As such you should always close a limited company with debt in a way that is responsible and puts creditors interests first.

What Action Can Creditors Take for Debts After a Company Has Been Dissolved?

After a company is dissolved, creditors have several avenues to pursue debts:

  1. Apply to have the Company Restored to the Register: Creditors can request the court to restore the dissolved company to the register, known as company restoration. If successful, the company becomes active again, allowing creditors to enforce debt recovery.
  2. Take Personal Action Against Directors: In certain situations, creditors might target the company’s directors personally. This is referred to as director’s liability. If directors are proven to have acted negligently or fraudulently, they could be personally responsible for the company’s debts.
  3. Pursue Company Assets: Creditors can seek court intervention to appoint a liquidator to sell off the company’s assets. This process, compulsory liquidation, aims to liquidate assets and distribute the proceeds to creditors.
  4. Issue Statutory Demands: A statutory demand can be served on a dissolved company, demanding payment of outstanding debts. If the debt remains unsettled for 21 days post-issuance, the creditor may petition the court to wind up the company.
  5. File a Winding Up Petitions: Creditors have the option to file a winding up petition against a dissolved company. If the petition is approved, a liquidator is assigned to liquidate assets for debt repayment.

Can HMRC Chase a Company for Debts After It’s Dissolved?

Yes, HMRC can chase a company for debts even after it has been dissolved. In fact, HMRC has up to 20 years to pursue a dissolved company for unpaid taxes. This is longer than the time limit for most other creditors, who only have six years.

If HMRC believes that a company owes them money, they can apply to the court to have the company restored to the register of companies. Once the company has been restored, HMRC can take enforcement action to recover the debt. This could include winding up the company and selling its assets.

HMRC have employees working directly with Companies House to monitor impending Strike Offs so they can check for companies with outstanding tax liabilities.

In all these scenarios, it’s crucial for creditors to adhere to legal protocols and for directors to be aware of their responsibilities and potential liabilities.

How Should Debt Be Dealt When a Company is Dissolved

There are two appropriate ways for directors to resolve company debts during dissolution:

  1. Repayment: If the company is financially solvent, it can repay its debts in full. This is the most straightforward approach, but it is not always possible.
  2. Liquidation: If the company cannot repay its debts, it may need to be liquidated. This is a legal process in which the company’s assets are sold to pay off its debts. Liquidation is overseen by a licensed insolvency practitioner, who ensures that creditors are treated fairly.

It is important to note that directors and shareholders may be personally liable for company debts if the dissolution process is not handled properly. For example, if the directors knowingly dissolve a company that is insolvent, they may be accused of misconduct.

If you are considering dissolving your company, it is important to seek professional advice to ensure that you comply with all applicable laws and regulations. Liquidation is the appropriate choice to deal with overwhelming debts and offers a clear process to walk away from a failed business without the concern that creditors will reinstate your company in the future.

Can You Dissolve a Company to Avoid Paying Debts?

Some directors may try to dissolve a company to avoid paying debts, but this is not a legal or effective way to do so. Creditors, such as HMRC, are likely to lodge an objection, and the company may be restored to the register so that creditors can seek payment of their debts.

In addition to the risk of having the company restored to the register, directors who try to dissolve a company with debts may also be held personally liable for the company’s debts. This is because directors have a duty to act in the best interests of the company’s creditors, and dissolving a company with debts may be seen as a breach of this duty.

If a company has debts, the best course of action is to seek professional advice. An insolvency practitioner such as ourselves can help you choose the best course of action.

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Directors may be personally liable for a dissolved company’s debts if they are found to have acted improperly or if they have given personal guarantees for the debts.

The time frame for creditors to pursue debts varies. Generally, creditors have up to six years to pursue most debts. However, HMRC can chase certain tax debts for up to 20 years after a company has been dissolved.

Generally, shareholders are not held responsible for a company’s debts upon dissolution, unless they have provided personal guarantees. The liability of shareholders is typically limited to their investment in the company.

Liquidation involves the orderly winding down of a company, where its assets are sold to pay off debts. Dissolution, on the other hand, is the process of legally closing the company. In liquidation, debts are actively managed, whereas in dissolution, the company must not have any outstanding debts or liabilities.

If a company is dissolved with outstanding employee claims (like unpaid wages), these employees are considered creditors. They can file claims for their unpaid earnings, and these claims will be addressed in accordance with the insolvency process undertaken.

Article sources

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws, and acts which provide their legal basis.

  1. Closing a Company
  2. Strike off your limited company from the Companies Register
  3. Liquidate your limited company