What Happens to Debts Once a Company is Dissolved?
There are some very clear legal mechanisms to deal with debt you cannot pay, but simply dissolving your company and hoping they will go away is not one of them. This article will explain what will happen if you attempt to strike off your company without having deal appropriately with your creditors.
We will also outline the correct methods of addressing your debt and winding up your company.
Companies That Owe Money Cannot Be Struck off the Register
The basic rules qualifying a company for being dissolved are:
• You must inform all interested parties
• You must write to each creditor including HMRC and let them know you are applying for striking off
• Deal with employees fairly, as per the law
• Deal with any business debts, assets and send final statutory accounts and a Company Tax Return to HMRC
• You cannot strike off if the company if your company has changed name in the last 3 months, and or, has traded in the last 3 months
• If your company is threatened with insolvent liquidation you cannot strike off.
• You cannot apply to strike off if you have an existing arrangement with creditors
It is also worth noting Companies House warning that “…Striking Off should not be seen as a cheap alternative to liquidation”.
Receiving an Objection to Company Strike Off
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 such as HMRC (or shareholders/other interested parties) 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.
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.
How to Wind up a Limited Company with Debts
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.
Struck off Companies with Debts May be Reinstated
One final thing to realise is that where a company has been struck off the register at Companies House, without objection from creditors, this doesn’t mean the matter ends there. 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.
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.
What Happens if a Dissolved Company Owes Corporation Tax?
To offer an example from our recent experience, we were approached by a limited company director that had struck itself off while still owing HMRC Corporation Tax.
The director was a bit surprised to find HMRC had applied to find the company reinstated. The restored company couldn’t pay its debt and had to apply for voluntary liquidation.
In the meantime, the director faced accusations of wrongful trading since he had made preferential payments subsequent to become aware of his company’s insolvency.