What Happens to Debts Once a Company is Dissolved?
The terminology relating to a company ceasing to exist can be very confusing.
It is really important to understand that there is a big difference between a company being liquidated and dissolved. The processes are very different. Put simply, a company can be dissolved with little paperwork and very low cost if it doesn’t have debts and has stopped or has never traded. Liquidation is very different, an Insolvency Practitioner is needed, the process costs money and takes time. Companies can be liquidated if they have debts or don’t have debts.
If you are confused about whether dissolving your company is possible and if not, what are your options, please do get in contact with us. A free initial consultation may well help you decide your next steps.
What Happens to Debts Once a Company is Dissolved?
When you dissolve a company, all debts owed must still be repaid. You must either repay the debts before commencing dissolution, or you choose a method of closing the company such as liquidation if you cannot repay them.
Some directors consider dissolving a company with debt as a means of avoiding liquidation costs. But the reason that the law requires limited companies with debt to be closed by a licensed insolvency practitioner is to ensure fair play for creditors. Hence, you can simply side step this process to avoid paying what you owe.
If you go ahead and dissolve the company, a creditor can still have your company restored to the register so they can seek payment. This also leaves you as the director open to potential charges of misconduct.
Can HMRC Chase a Dissolved Company?
HMRC can certainly pursue company’s which have been struck off. 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 they are not even constrained by time limit. 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
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.
If your Company is Insolvent, Dissolving it is not an Option
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.
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.
- Closing a Company – https://www.gov.uk/closing-a-limited-company
- Strike off your limited company from the Companies Register – https://www.gov.uk/strike-off-your-company-from-companies-register
- Liquidate your limited company – https://www.gov.uk/liquidate-your-company/creditors-voluntary-liquidation