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Written by:

John A Waller

Director

Reviewed 22nd March 2021.

Can you close a limited company with debt?

Can you close a limited company with debt? Yes, you can.

Great care should be taken when considering dissolving a company in debt.

What Happens to Company Debts when Dissolved?

If your limited company has creditors unpaid? Often directors believe, therefore striking off the company resolves the situation.

However, being removed from the Companies House Register does not allow avoiding repayment to the company’s creditors, and indeed attempting to may have dire circumstances. 

Dissolve: the definition – Striking off a Limited Company?

It remains a cost-effective process to close a limited company by striking it from the Register at Companies House. It will help if you understand the principles for striking off.

So, the company therefore needs to prove it is

  • Solvent; 
  • Ceased trading and;
  • No outstanding legal action.   

Striking off a limited company however is simple. However, the rules applied are not as simple. You may not then use the process to close a company with debts. 

For further detailed reading, please view ‘companies house striking off‘.

Dissolving a Limited Company with unpaid debts

Insolvent companies should never attempt to use the strike-off process to then close a company down. Alternatively, the company’s commitments require repaying; therefore, before the company may attempt to strike off. Also, all legal action if any, along with any creditor action, involves settlement.

If a business is in an insolvency process, it may not attempt to strike the company off.

If company debts remain, HMRC will likely reject or challenge attempting to dissolve an insolvent company (if crown debt). Therefore, use Creditors Voluntary Liquidation if this is the case. 

Insolvency

Insolvency is when you are unable to pay your creditors as and when they fall due. The term refers to an individual and a corporate entity, including a limited company.

Two tests exist to determine Insolvency:

  • Cash-flow insolvency and

  • Balance-sheet insolvency. 

What Happens if you try to Strike Off a Limited Company With Debts?

To be struck off therefore, requires a solvent company. However, should the company strike off the company, notwithstanding debts, unpaid then:-

  • Creditors of the company object to striking off application.  
  • Company Creditors may apply to reinstate the company.

Dissolution benefits

  • A rapid process to remove a dormant company from the registrar at Companies House;
  • Little if no cost as with a liquidation;
  • No examination required into former company directors conduct.

Dissolution downside

  • Companies need the approval of their creditors to then apply for a dissolution;
  • Any shareholder, creditor or liquidator can apply to revive the company for up to 20 years after dissolution.
  • The company faces reinstatement if:
    • Inadequate notice to the companies creditors;
    • The dissolved company traded within the last three months;
    • An act of fraud is proven, highlighted along with other actions by the former directors, like misfeasance associated with the company during its dissolution.
  • Dissolving a company requires careful actions while disposing of assets of the company. Directors then need to tread carefully, paying creditors. Failure to do so opens the dissolved company to reinstatement and investigation. 

Suppose you require clarification on an application to dissolve your company. Please book a VIRTUAL meeting safe and private, or call our free phone on 0800 612 5448.

Downsides against liquidation

  • Dissolution differs from a formal liquidation process. When commencing to dissolve a limited company, directors must ensure full payment of creditors. Other than regular trade creditors. Attention needs to be paid to like Hire Purchase agreements, known company contingent liabilities, leases on any vehicles, and property leases cease. If not? Directors of the company should consider a formal closure by a licensed insolvency practitioner. The process includes a Company administration, Company Voluntary Arrangement or Creditors Voluntary Liquidation. The financial status of the company, along with its viability and future intent, will in the main dictate the process once the directors select the voluntary choice.
  • From a creditors’ perspective, dissolution avoids a formal investigation into the director’s conduct. However, transactions considered a preference or attempted or have defrauded the company’s creditors or basic fraud committed. Dissolution does not afford an investigation into past conduct. If the creditors believe such transactions may have occurred, they can, of course, refuse permission, and the company will either liquidate voluntarily or compulsorily.

Can HMRC Pursue a Dissolved Company?

YES.

HMRC can seek a dissolved company, especially when suspicious or informed of directors, evading duty and tax.

HMRC investigations may then be still achievable up to 20 years.

For further information on what the HMRC may commence against directors;-

Please read ‘can HMRC pursue a dissolved company‘? & ‘Can HMRC hold directors liable for outstanding tax‘?

How do you Close Down a Company with Debts? 

Closing down a company with unpaid debts requires a creditors’ voluntary liquidation. It would help if you then appointed a Licensed Insolvency Practitioner who will handle the liquidation. They will nominate independent agents to value and sell company assets. The liquidator then distributes the liquidation proceeds to creditors who have filed a legitimate claim in liquidation.

If the limited company has no assets to repay creditors, then an administrative dissolution can be used. Therefore, an insolvency practitioner helps the company’s director resolve its debts before closure.

Directors Can Be Held Personally Liable

There have been instances where directors have successfully closed their businesses by striking off as a deliberate attempt to avoid repaying their creditors. However, in most cases, the creditors discover what has happened and apply to 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 for up to 15 years. Please ensure you understand your director’s duties and responsibilities.

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