Can A Company Be Dissolved With Outstanding Debt?

June 23, 2023 / Business Insolvency

For many directors, closing a company will be something that must be considered at one point or another. This could be for any number of reasons, whether it be to retire, free up funds for new ventures, or otherwise. While closing a company is never trivial, it is particularly difficult for a company with debts. Directors of a company with debts have additional obligations that must be upheld, and specific methods of closing are off the table. For this reason, some directors have wondered if dissolving a company with debt is possible.

In this article, Clarke Bell will answer this question, discuss how dissolving a company works, and outline a few alternatives to this procedure.

Dissolving a company with debt

One method of closing a company is dissolution, a voluntary procedure sometimes referred to as a company strike-off. The process aims to ensure a company is dissolved, or wound up and removed as a commercial entity. It is an option available to directors of solvent companies, or companies with more assets than debts and liabilities. It can be initiated voluntarily by submitting a DS01 form to Companies House. This can be done in paper format or through an online portal, costing £10 and £8 respectively. This makes dissolution one of the most cost-effective methods of closing a solvent company.

If directors choose to dissolve their company, it is vital that they ensure all outstanding debts are paid, and every business asset is either sold or otherwise removed from the company before the end of the procedure. Once the process is complete, the dissolved company will be removed from the Companies House register, meaning it is no longer a legal entity. Any business assets that remain registered under the company after it is dissolved will be considered “bona vacantia”, or without an owner, and will be transferred to the Crown.

Although certainly useful, dissolution is not an option for insolvent companies with large debts. It is a procedure meant only for solvent companies, meaning only companies that can repay their outstanding debts and liabilities are eligible. This does not mean that dissolving a company with debt is impossible, provided these outstanding debts are repaid, but it does mean that insolvent companies are ineligible. Attempting to dissolve an insolvent company will likely be obstructed by creditors, and may lead to legal repercussions for directors. Even if the company is successfully dissolved, creditors can petition to reopen it in order to collect repayments.

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Alternatives to dissolution

If your company is insolvent and dissolution is off the table, you will need to consider alternative methods of closing a company or handling debt. Which alternative is appropriate will depend on the goals you have in mind for your company.

Liquidation

If you would like to close your company, but dissolution is not an option, voluntary liquidation may be a good solution for you. More specifically, entering your company into Creditors’ Voluntary Liquidation (CVL) could be extremely beneficial to both you and your company.

The CVL process offers a series of various benefits. First, it is a voluntary procedure, meaning directors are able to appoint an insolvency practitioner of their choice to the position of liquidator. This allows directors to appoint a liquidator that best suits their needs, rather than having one foisted upon them. While in this position, the liquidator will essentially take control of the company, identifying assets and disposing of them for the highest value possible. The proceeds will then go to repaying outstanding debts and liabilities. If any outstanding debts remain at the end of the process, they will be written off unless secured by a personal guarantee. Once all distributions have been made, the company will be wound up and removed from the Companies House register.

CVL Process

An efficient method of liquidation is not the only benefit to using the CVL process. The process offers significant legal advantages, beginning with protecting the company from legal action once underway. This essentially protects the company from a winding-up petition and the compulsory liquidation that so often follows. Furthermore, as a CVL is a voluntary process, it acts as an excellent defence against accusations of director misconduct, and dramatically reduces the likelihood of such accusations being made. This is because directors have shown a willingness to act in the best interests of creditors by entering the company into a voluntary liquidation procedure, considering the repayment of debts as more important than the existence of their company.

The CVL process also allows directors to apply for director redundancy. If eligible, you may be approved to receive financial support depending on your age and how long you worked for the company. To prove eligibility, you will need to prove that you worked for your company in the capacity of an employee, and provide documents such as your wage slips and company accounts. For these reasons, the CVL process is an excellent way to close a company with debts.

Business Rescue

If you would prefer not to close or dissolve a company, and instead would rather the doors remain open, a Business Rescue plan could be the right alternative for you. This plan would be created with your business goals in mind, rather than forcing your company down a specific path.

If your company had a viable business model, but was struggling under the weight of its debt and payment obligations, the Business Rescue plan may focus more on a Company Voluntary Arrangement (CVA). This process aims to renegotiate the terms of loan agreements between the company and its creditors, reaching a new agreement that suits all parties. For example, creditors may receive their payment over a longer period of time than first agreed, but will receive more than via a CVL.

Alternatively, a Business Rescue plan could emphasise restructuring, placing profitability as the main priority. This could be done through cost-cutting, changing focus, or a range of other means. In any case, your Business Rescue plan will aim to get your company back on track.

Clarke Bell can help

If your company is struggling under the weight of its debts, don’t go it alone; let Clarke Bell help. We have more than 28 years of experience in helping companies find the best solutions to their problems, whether it be liquidation, a Business Rescue plan, or otherwise. We can do the same for you. Don’t hesitate to contact us today for a free, no-obligation consultation and find out exactly what we can do for you.