If you have a company with debts that you no longer want to run, you might think that striking the business off the Companies House register, a process known as dissolution, is the simplest solution. But what happens to debts once a company is closed down?
In this guide, we’ll explain how the dissolution process works and explain the other methods you can use to shut down the business.
What Happens When a Company is Dissolved?
Company dissolution is the simplest and most cost-effective way to close a private limited company (LTD) or a limited liability partnership (LLP). There are no liquidation costs, no investigation into your conduct as a director and you can set up a new business straightaway and even use the same business name as the dissolved company.
The process is cheap and easy. All you have to do is pay an £8 (online) or £10 (offline) disbursement fee to Companies House and complete and submit form DS01. If you meet the company dissolution criteria, a notice will be published in the Gazette giving interested parties three month’s notice of your intention to strike off the company. If no objections are received, the business will be removed from the Companies House register and will cease to exist.
What Happens to Debts Once a Company is Dissolved?
Despite the simplicity of this procedure, some strict rules apply before a company can be dissolved:
- It must be solvent
- There must be no ongoing legal action against the business
- It cannot be undergoing a creditor agreement such as a company voluntary arrangement (CVA)
- It must not have traded or been involved in any activities other than the striking off procedure for the last three months
- It cannot have changed names in the last three months
- It cannot have sold any property or rights in the last three months
So, for a company to be dissolved, it must be solvent and have no outstanding creditor legal action against it. If the company cannot afford to repay its debts, striking off is not a method that can be used to close it down.
What Happens to Creditors When a Company is Dissolved?
Settling debts owed to creditors such as HMRC and suppliers must be factored into the overall cost of dissolution if that is the route you want to take. You must also repay any money you owe to the company in the form of directors’ loans. If you do try to dissolve a company with outstanding debts, it’s highly likely that your creditors will take action that could bring serious consequences for you personally.
- Creditors can object to the striking off application – All company creditors must be informed that a striking off application has been made by the company. They can then object to the dissolution and take enforcement action to force the repayment of the money they are owed.
- Creditors can apply for the company to be reinstated – Once a business with debts has been dissolved, any outstanding creditors can apply to have the company reinstated to the Companies House register so they can take action to recover the debt.
What Happens if you try to Dissolve a Company With Debts?
If you try to dissolve your company as a method of evading your creditors, you could find yourself in hot water. If it’s found that you failed to notify a creditor of your application to dissolve the company, you could be prosecuted and even barred from acting as a company director for a period of up to 15 years.
If you dissolve a company with debts successfully, any creditor has the right to commence legal action to reinstate the company for a period of up to 20 years. That will also raise serious questions about your conduct while operating as a company director and could lead to a formal investigation by the Insolvency Service.
If the Insolvency Service’s investigation reveals acts of wrongful trading, fraudulent trading or misfeasance while operating as a company director, you could face financial penalties, be made personally liable for company debts, be disqualified as a director and even receive a custodial sentence of up to seven years.
Can you Close a Company With Debts?
Yes. If your company has debts that it cannot afford to repay and carrying on is no longer viable, you can close down the business using a formal insolvency procedure known as a creditors’ voluntary liquidation (CVL). In a CVL, an insolvency practitioner will be appointed to take control of your company, sell its assets and the proceeds will be distributed among its creditors.
Initiating a creditors’ voluntary liquidation is an effective way of taking control of the situation and engaging with creditors before they take formal action that could end up in compulsory liquidation. If the company doesn’t have substantial assets that can be sold for the benefit of its creditors, the other procedure that can be used is administrative dissolution. In that instance, an insolvency practitioner will help the directors to clear the company’s outstanding debts before it is struck off the register.
Are Directors Personally Liable for Company Debts?
If a company with outstanding debts is closed down via a creditors’ voluntary liquidation or an administrative dissolution, the business has been run properly and there are no personal guarantees, you will not be held personally liable for company debts. Any debts that have not been repaid from the sale of company assets will be written off and the creditors will not be able to pursue you personally.
However, if you do not shut down the business properly, continue to trade when the business is insolvent or fail in your duties as a director, you could lose the protection of limited liability. A liquidator could then take action against you personally to contribute to the debts of the company.
Do you Want to Close a Business With Debts?
Do you have a business with outstanding debts that you want to close? Or perhaps you’d like to explore whether it’s possible to save the company? Just call 0800 24 24 51 or email email@example.com for free and confidential advice.