What Happens To Debts When a Company is Dissolved?

March 26, 2024 / Business Insolvency

Dissolution is a procedure commonly used by directors to close their solvent companies. It grants directors a relatively quick and easy method of withdrawing funds and assets from a company, along with having said company removed from the Companies House register. However, the procedure becomes much more complex should insolvent companies make an attempt at dissolution.

In the event an insolvent company’s directors attempt dissolution, its debts will not be written off, unlike with certain other procedures. Instead, creditors will be within their rights to pursue these debts, which could result in severe consequences for both the company and its directors.

In this article, Clarke Bell covers the company dissolution process, how it can affect insolvent companies, and alternative procedures for such companies.

What is company dissolution?

Company dissolution is a formal procedure for closing a solvent company. It can be initiated by directors at any point with the board’s consent, requiring the submission of a DS01 form with Companies House. This form can be submitted either in paper format or through the online portal, costing £10 and £8, respectively.

Unlike other forms of closing a company, directors shoulder the overwhelming majority of responsibility for the procedure. They must ensure their company is completely eligible, that the procedure is followed to a tee, and all assets are removed from company ownership before the procedure ends. Failure to adhere to these requirements, amongst others, can result in a range of consequences, including the loss of assets and potentially legal repercussions.

Can I dissolve an insolvent company?

Dissolution is a procedure intended for solvent companies. It requires a company to have paid off its debts and liabilities, along with concluding any contracts it may have before entering the procedure. Lastly, a company must have ceased trading for three months in order to be eligible. Naturally, an insolvent company cannot meet these criteria, meaning it is ineligible for dissolution.

Despite being ineligible, it is still possible for directors to try to dissolve their insolvent company, although it is likely to cause many more problems than it solves. By placing an insolvent company into dissolution, directors may be perceived as attempting to flee their debts. As such, it is entirely likely that the attempt at dissolution will be rejected, and directors may face legal consequences. For this reason, it is advisable to avoid dissolving insolvent companies in favour of using alternative procedures.

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What happens to debts when dissolving an insolvent company?

As a company is expected to be solvent when entering dissolution, there are no provisions made for those with debts. Any debts or ongoing transactions ought to have been paid long before the company was dissolved, otherwise the company in question wouldn’t have been considered eligible. If an insolvent company manages to dissolve despite its debts, these debts will remain outstanding, even if it is successfully closed. Creditors will be within their rights to pursue the company for repayment, potentially resulting in legal action.

Consequences of dissolving an insolvent company

An attempt at dissolving an insolvent company is likely to be spotted by Companies House, resulting in a refusal from the get-go. Second, even in the event an insolvent company is permitted to dissolve, a notice must be posted in the Gazette. This gives parties related to the company an opportunity to spot the upcoming dissolution, affording a window of time to act. For example, creditors may spot the notice in the Gazette and lodge an objection against the attempted dissolution. With evidence of an outstanding debt, this will be open and shut.

Once a company’s creditors have successfully objected to an attempted dissolution, the next steps largely depend on the creditors themselves. Some creditors may simply demand repayment and leave it at that, assuming the debt is repaid. Others, however, may choose to submit a winding-up petition to the courts. If successful, a winding-up petition will result in the court-ordered liquidation of the company, with the proceeds going to its outstanding creditors, and may even result in legal penalties for directors. Should the company manage to successfully dissolve, its creditors have the right to petition the courts to reinstate the company. In doing so, creditors will essentially restore the company as a legal entity, allowing for its compulsory liquidation.

In some instances, directors attempting to dissolve an insolvent company may be suspected of misconduct. During such cases, an investigation will be opened by the Insolvency Service. Should a director be found guilty of misconduct, a series of consequences may be applied. Such consequences may include fines, disqualification of a director’s license for up to 15 years, personal liability for company debt, and even a prison sentence.

Alternatives to company dissolution

Rather than attempt to dissolve an insolvent company, and risk the consequences detailed above, directors might consider alternative solutions. One such alternative is Creditors’ Voluntary Liquidation (CVL). The CVL procedure is commonly used to close insolvent companies, without incurring any of the aforementioned negatives. Upon gaining the consent of the board, directors may appoint a licensed insolvency practitioner of their choice to the position of liquidator. While in this position, the insolvency practitioner will be responsible for carrying out the procedure, including the disposal of assets, dispersal of funds, and closing of the company. Once all possible distributions have been made, the company will be closed and removed from the register at Companies House. Should any debts remain at this stage, they will be written off, with the exception of those secured by personal guarantee.

In addition to a clear method of closing an insolvent company, the CVL procedure affords certain legal benefits. Once placed into the procedure, a company will be protected from legal action. This effectively prevents the serving of a winding-up petition and the subsequent compulsory liquidation. Furthermore, as entering a company into the CVL procedure demonstrates a director’s willingness to act in the interests of creditors, it provides significant protection against accusations of misconduct. While these accusations may still be made, voluntarily entering into a CVL provides a strong defence.

Clarke Bell can help

Dissolution is a viable method of closing a company, one that grants directors an exceptionally cost-effective and straightforward method of doing so. Moreover, it can be relatively quick, provided directors have made adequate preparations beforehand. That said, dissolution requires a company to be solvent, meaning insolvent companies must look for alternative solutions. Clarke Bell can help you find these solutions.

We have more than 29 years of experience in helping insolvent companies find the best path forward. We can do the same for you. Whether it be the implementation of a business rescue plan or a Creditors’ Voluntary Liquidation, our team of experts will be on hand to ensure the best outcome 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.