What Happens to Debts Once a Company is Dissolved?

Dissolving a Company with Outstanding DebtsIf 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.

It is really important to understand that there is a big difference between a company being liquidated and dissolved. The processes are very different.

A company can be dissolved simply with very little paperwork and low cost if it doesn’t have debts and has stopped or has never traded. Where as liquidation is very different, a lisenced Insolvency Practitioner is needed, to complete the process and this incurs costs and takes time.

Companies can be liquidated if they have debts or don’t have debts. If you are unsure about if you should dissolve your company, or even if its is possible or not, what are your options, please do get in contact with us. We offer a free initial consultation may well help you decide your next steps.

Dissolving a Company with Outstanding Debts

If you have opted to dissolve a company then all debts owed must still be repaid. You will need to ensure they are repaid before commencing dissolution, or if you cannot repay them you need to close your company via the liquidation process.

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.

Can HMRC Chase a Dissolved Company?

When a company is dissolved, it is removed from the Companies House register. This means that the company no longer exists and cannot conduct business. However, this does not mean that the company’s liabilities are automatically wiped clean. In particular, HM Revenue & Customs (HMRC) can still chase a dissolved company for unpaid taxes.

If the company owes money to HMRC, the liabilities will transfer to the company’s directors. As a result, it is important for directors to be aware of their potential liabilities before dissolving a company. If they are not, they may find themselves facing unexpected tax bills

Objections to Company Strike Off

Companies are often struck off the register when they have ceased trading and there is no likelihood of them resuming business. However, there are a number of objections that can be made to this process.

First, if the company has been struck off in error, it can be very difficult and time-consuming to have the decision reversed. Second, even if the company is no longer trading, its assets may still have value and could be sold to repay creditors. Finally, the directors of the company may be liable for any debts incurred by the company during the course of its business, even if it is no longer trading.

As a result, there are a number of potential objections to strike off that should be considered before taking any action.

The legal responsibility to inform interested parties about your decision to strike off falls on the director (s) of the company. This action will be advertised in the Gazette, so it will become public knowledge.

Connected parties to the business has the legal right to object, this includes:

  • Employees
  • Shareholders
  • Creditors

Companies House will also notify HMRC automatically of any application to strike off. HMRC in the past have automatically objecting to the striking off application should there be any outstanding tax liabilities or if they have not been notified of the strike off.

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. The vast majority of these cases, once 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 by the insolvency service for a period of up to 15 years.

How do you Close Down a Company with Debts? 

Closing down a company with debts requests a formal insolvency process If you have outstanding debts you cannot afford to repay, the voluntary liquidation process 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. 

Want to close a business with debts?

If you want to close down your business in the most cost-effective way? Get in touch with one of our insolvency practitioners for a free, no-obligation and confidential consultation today.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.