Do Not Use Dissolution as a Solution for Your Company’s Debt

December 12, 2022 / Business Insolvency

It is not uncommon for a company to struggle with debt issues. Especially given the recent series of problems that have plagued Britain’s economy. Many companies have been forced to shoulder more debt than would be ideal, solely to remain in operation. However, for many of these companies, the time to pay has come due, and they simply don’t have the means to do so.

For companies in such a position, it can be tempting to use dissolution to solve their debt. For directors of insolvent companies, this method is likely to cause more and worse problems than you are currently facing. Instead, you should speak to Clarke Bell, and enlist professional help.

What is company dissolution?

Directors of insolvent companies are in a more precarious position than those of solvent companies. Creditor pressure is difficult to endure, solutions seem distant, and every misstep has the potential to bring far-reaching consequences. As such, it’s no wonder that many directors attempt to use any solution they come across, even if they don’t fully understand it.

Company dissolution is one of these seemingly-good solutions. Put simply, it is a method of closing down a company, striking it off from the register kept at Companies House. In doing so, some directors hope that they can wash their hands of their company’s debt, solving their financial issues. This is not the case. Company dissolutions are only available to solvent companies, and are a perfectly viable method of closing an eligible company.

If your company is not eligible, yet you attempt to pursue the path of company dissolution, you run the risk of severe consequences. Your application to use a company dissolution may be seen as an attempt to flee from your obligations to creditors. Which itself is a form of director misconduct. The penalties for doing so include fines, suspension of your director’s license, and potentially even a prison sentence. Needless to say, this is not a good solution.

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Pressure from banks and HMRC

Although company dissolution is not a solution, many companies across the country face immense pressure from banks and HMRC. This is primarily due to the relatively recent Bounce Back Loan Scheme (BBLS).

This scheme was devised by the government at the height of the Coronavirus pandemic, and aimed to give businesses a cash stimulant to remain in operation. Bounce Back Loans were made widely available, guaranteed by the government, and required very little from the borrower. However, they were by no means a gift, and companies were expected to pay them back later on.

Despite being offered with quite favourable repayment terms, many companies are reeling from this debt having come due. Bounce Back Loans were provided to a great many companies, with plenty not making efficient use of the funds, or not reasonably being able to make repayments. This isn’t ideal at first glance, but as lockdown measures lasted for much longer than anyone realised, the expected economic climate left a lot to be desired when repayment came due. Companies that based their estimates on the expectation that lockdown measures would be short-lived were far from accurate, and are now left with a hole in their accounts.

However, this hasn’t stopped the lenders of these Bounce Back Loans from demanding repayment. Although the government has guaranteed these loans, they are ultimately the borrower’s responsibility. Recipients of Bounce Back Loans must make repayments, and as stipulated in the loan agreement, make every effort to do so. Lenders are even entitled to take more forceful action in the event a borrower is unreliable in their repayment efforts. With mounting pressure from HMRC and other lenders of Bounce Back Loans, yet without dissolution as a viable solution, what is a company director to do?

Alternative solution to company dissolution

As we have discussed, dissolving an insolvent company is not the path forward. While you are free to pursue it, your attempt at dissolution will likely be rebuffed, resulting in considerable consequences for you as a director. Furthermore, even if you are successful, the Department of Business has the power to investigate and reinstate your company. A compulsory liquidation is likely to follow, which will carry its own set of serious consequences in this situation.

Instead of taking this risk, you should contact a licensed insolvency practitioner for professional help. If your company is insolvent and struggling with creditor pressure, the best solution is almost certainly a Creditors’ Voluntary Liquidation (CVL). Professional help in executing this procedure will be invaluable.

A CVL is arguably the best solution for insolvent companies looking to close. It ensures that obligations to creditors are met, while offering a decisive solution to your company’s debt problems. Furthermore, it’s a voluntary procedure, allowing you to appoint an insolvency practitioner of your own choice. They will communicate with your company’s creditors, assist with documentation, liquidate assets and accounts, and distribute the proceeds amongst creditors. After, they will wind up the company, having it struck off from the register at Companies House, causing it to cease as an entity.

In addition to being an effective method of liquidation, the CVL process offers directors certain legal protections. Once the procedure begins, creditors will no longer be able to take legal action against your company. This will protect you from a winding-up petition, sparking a compulsory liquidation, and taking the situation out of your hands. Moreover, any debt that remains unpaid after the procedure will be written off. Your creditors will not be able to hound you for payment, nor target your personal finances. However, you will still have to pay if you signed a personal guarantee as part of a loan agreement. All in all, you will be able to solve your debt problems while upholding obligations to creditors. Leaving you free to pursue other ventures without any financial or legal baggage.

Clarke Bell can help

If your company is struggling with debt and creditor pressure, let Clarke Bell be there to help you. We have more than 28 years of experience in helping companies solve their debt problems, and we can do the same for you. Whether you need a CVL or another procedure, our team of experts will be there to carry out a solution tailored to your company. Contact us today for a free, no-obligation consultation, and find out what we can do for you.