What Happens to Debts when a Company is Dissolved?
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. Providing you meet the criteria for striking off i.e. the business is solvent, is no longer trading and has no outstanding legal action against it, this is a quick and pain-free way to close your business.
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). One of the most important rules is that this procedure cannot be used to close down a business if it has outstanding debts.
Dissolving a Company with Outstanding Debts
Insolvent companies i.e. those that cannot afford to pay their debts when they become due, cannot use the striking off procedure to close their companies down. Instead, all of the company’s debts must be repaid in full before the company can be struck off and any ongoing legal action or creditor action must be resolved. 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).
If an application is made to strike off a company before all of its debts have been cleared, the application is likely to be rejected by Companies House and the business will be viewed as insolvent. 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, potentially leading to personal liability for company debts and/or director disqualification for a period of up to 15 years.
What Happens if you try to Strike Off a Limited Company With Debts?
A business must be solvent before it can be struck off and have repaid all the money it owes, including all of its creditors and any directors’ loans. If the company decides to go ahead with the striking off despite the presence of outstanding debts, 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 then has the option to object to the dissolution and the striking off application will be suspended.
- 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 indeed pursue a dissolved company, particularly if they feel they have tried to evade responsibility.
These investigations may happen up to 20 years after the fact.
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.
- Disqualification as a director for a period up to 15 years
- Personal liability for company debts
- Potentially unlimited financial penalties
- A custodial sentence of up to seven years
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 business does not own assets that can be sold to repay its creditors, an administrative dissolution might be the best option. In that case, an insolvency practitioner will be appointed to help the director settle the company’s debts before it can be closed down.
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.