If your company has debts that it either cannot afford to or perhaps would prefer not to pay, you might consider getting it ‘struck off’ or ‘dissolved’ to close the company down.
However, getting struck off the Companies House Register is not an easy way to avoid repayment – far from it in fact – and if you do try to strike off a limited company with debts, you might live to regret it.
What is Dissolving or Striking off a Limited Company?
As a company director, the most cost-effective way to close a business down is to strike it off the Companies House Register. It is quick, but the company must qualify. In the previous three months it must not have traded, changed its name, sold off its stock or carried on any other activity beyond winding up its affairs, and no insolvency or restructuring process (a proposed or running CVA, administration, liquidation or winding-up petition, receivership, or a court-sanctioned scheme or restructuring plan) can be pending or under way. Solvency is not itself a condition.
Despite the relative simplicity of striking off when compared to other methods of closing a business, there are still some strict rules that apply to the process (read more about how to strike off a limited company). Owing money does not in itself bar an application, but every creditor must be sent a copy within seven days, any creditor can object, and the debts are not written off: the company can be restored to the register and the directors’ conduct investigated.
Dissolving a Company with Outstanding Debts
Strike-off is the wrong route for a company that cannot pay its debts, though it is worth being accurate about why. Solvency is not a statutory eligibility condition in the Companies Act. What stops it in practice is that any creditor can object, and the registrar will normally suspend the application when they do. Equally, a business cannot apply to be struck off the Companies House Register if it is currently undergoing an insolvency procedure such as a Company Voluntary Arrangement (CVA).
Dissolution also does not make the debts disappear. A creditor can apply to have the company restored to the register for up to six years, and since the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 the Insolvency Service can investigate the conduct of directors of a company that has already been dissolved, without restoring it first. That power is retrospective. The most appropriate way to close down a business, in that case, is likely to be through a Creditors’ Voluntary Liquidation (CVL).
Directors Can be Held Personally Liable
There have been instances where directors have successfully closed down their businesses via striking off as a deliberate attempt to avoid repaying their creditors. However, in the vast majority of cases, the creditors discover what has happened and apply for the company to be reinstated. That brings additional risks for the company directors as their conduct is likely to be investigated. That can lead to disqualification for up to 15 years and, at the court’s discretion, an order to compensate creditors for loss the director’s conduct caused or, if the restored company is wound up, to contribute personally to its assets.
What Happens if you try to Strike Off a Limited Company With Debts?
In practice you should have settled what the company owes, including any overdrawn director’s loan account, before applying. If you apply anyway with debts outstanding, two things are likely to happen:
- Creditors object to the striking off application – If the company has debts that have not been repaid then the creditors must be informed of the striking off application. The creditor can then object to the dissolution, and the registrar will normally suspend the striking off application while the objection is dealt with.
- Creditors apply for the company to be reinstated – Creditors who want to take action against the company to recover the money they’re owed can apply for the company to be reinstated to the Companies House Register. The creditors can then take enforcement action to recover the debt.
What Risks does Reinstatement to the Companies House Register Bring?
If you do attempt to strike off a company with outstanding debts, it’s highly likely one of the company’s creditors will apply for its reinstatement, particularly if the value of the outstanding debt is high. If HMRC is one of these creditors the same applies.
Can HMRC Pursue a Dissolved Company?
HMRC can still pursue the debt, but not against the company while it is dissolved. Like any other creditor, it must first apply to the court to have the company restored to the register, within six years of dissolution. It is more likely to do so if it believes the directors struck the company off to avoid the tax.
HMRC can normally assess company tax up to four years after the end of the accounting period, six years if the loss of tax was careless and up to 20 years if it was deliberate. To recover the tax from the company itself, though, it still has to apply for restoration within six years of dissolution.
That will also bring serious questions regarding director conduct in the form of a formal investigation by the Insolvency Service. If the investigation finds any acts of wrongful trading, fraudulent trading or misfeasance during your time in office, you could find yourself on the receiving end of one or more severe penalties.
These include:
- Disqualification as a director for a period up to 15 years
- A court order to contribute personally to the company’s assets (if it is wound up), or to compensate creditors for loss your conduct caused
- An unlimited fine on conviction for fraudulent trading
- A custodial sentence of up to ten years, where fraudulent trading is prosecuted under section 993 of the Companies Act 2006
How do you Close Down a Company with Debts?
If you want to close your company down but have outstanding debts you cannot afford to repay, a creditors’ voluntary liquidation (CVL) is likely to be the most appropriate route for you. In a CVL, an insolvency practitioner will be appointed to take control of, value and sell company assets, before distributing the proceeds to the creditors to repay the outstanding debts.
If the company has no assets worth realising, the choice is narrower but it is still between real procedures. A CVL remains available and is usually right where creditors are pressing or the conduct needs documenting. Strike-off is possible where no creditor objects, but it is not a way of writing debts off: they survive, the company can be restored to the register for up to six years — with no fixed deadline where the purpose is a personal injury claim, provided that claim is not itself out of time — and the directors’ conduct can be investigated whether it is restored or not. Which of the two fits depends on the creditors, not on the assets, and it is worth an hour with an insolvency practitioner before choosing.
Want to close a business with debts?
Do you have a business with debts that you want to close down in the most cost-effective way? Get in touch with the insolvency practitioners at AABRS® for a free, no-obligation and confidential consultation today.