When company debts mount up and a business cannot pay the money it owes, this does not necessarily mean the end. In fact, there are many types of company rescue procedures that may be able to restore the business to financial solvency. However, in some cases, the best option may be to close the organisation down and sell its assets to pay off the debts it owed.
This is not always a simple process when a company owes money. Under most circumstances, company directors can dissolve a company in a fairly straightforward way, for no other reason than that they don’t want to run the business anymore. If the value of company assets exceeds that of company debts, this is still an option, as the sale of these assets will be used to pay the outstanding debts. In some cases, company members will receive a dividend during this process, if the value of assets exceeds debts.
However, when a company has debts it cannot pay, dissolving it is no longer an option – instead, the business must pursue one of several company rescue or insolvency procedures. These are designed to pay back outstanding debts and either restore the business to financial solvency so that it can continue trading, or close it down to ensure the highest possible return for creditors.
All of this can be complicated, and the first step you should take if you are concerned about your business’ future or its financial difficulties is to seek expert advice. The team at Company Insolvency Advice has a wealth of experience in the dissolution process, the various company restoration processes that may apply and the steps you need to take to close a company, no matter its financial situation. We can provide professional advice tailored to your specific circumstances and help you to choose the path that best aligns with your desired outcome.
To help you get started, we have prepared this guide in which we will explain the process of having a company dissolved, the eligibility considerations you need to make, and the potential outcomes you can pursue if striking off the company is not an option.
How to dissolve a company
If you represent a limited company that has sufficient assets to pay off its debts, you can usually apply to have it struck off the Companies House register. This is typically what is meant by “dissolving” the company. The process is relatively straightforward, although it can help to work with licensed insolvency practitioners or other experts to make sure you meet all of your legal obligations.
- Check eligibility requirements: Certain restrictions apply when dissolving a business, beyond the fact that it must be financially solvent. For example, if you have changed the company’s name or sold off stock in the last three months, you cannot dissolve a limited company. If you have any ongoing agreements with creditors, such as payment plans, this will also prevent you from dissolving the company.
- Secure approval from directors: The company’s owners and directors must agree to dissolve the business before you can begin the dissolution process.
- Close down the company: You must announce your intention to close the company to any interested parties, including HM Revenue and Customs and all the creditors to which the company still owes money. You must deal with any business assets and bank accounts, and settle any debts.
- Apply to be struck off: Fill in the application and send it to Companies House. You must notify any interested parties within seven days of filing the application – this will include shareholders, creditors and employees. You will also need to send final statutory accounts and a company tax return to HMRC at this stage.
- Wait for two months: If your application has been filled in correctly, you will receive a letter from Companies House and the notice itself will be published in The Gazette. This is an opportunity for creditors or other parties to object or to make claims against the company’s assets. If there are no such objections, the dissolution will conclude at the end of a two-month period following the publication of the notice in The Gazette. A second notice will be published to confirm that the business is closed.
While this sounds relatively simple, there are a lot of legal obligations that a company director must meet in trying to dissolve their organisation. As such, it is best to work with expert advisors during this formal process to make sure your initial application is filled in correctly and that everyone is notified in accordance with the law. Otherwise, there is the possibility of legal action or the dissolution process being interrupted, which can lead to the company staying open.
How to close a company that cannot pay its debts
Normally, you cannot dissolve an insolvent company by striking it off; it must go through liquidation. The liquidation process is a formal procedure where an insolvent company’s assets are liquidated to repay creditors. A licensed insolvency practitioner will be brought in to manage the company’s outstanding debts, sell its assets, and make distributions to creditors in order of priority.
If an attempt is made to dissolve an insolvent company without going through proper liquidation, it may be restored to the Companies Register for the debts to be addressed. Dissolution is generally for solvent companies that have settled debts or have no debts. However, if an agreement is reached with creditors, it may be possible to dissolve a company in some cases.
The first step for a company director in trying to understand the options that are available and the best route to take is to speak with an expert. The team at Company Insolvency Advice can talk to you about your company’s financial situation and evaluate the likelihood of restoring it to a good financial position. We can also advise you on the mechanisms you can use to pay off debts or to close your company down. A company director will not be held personally liable for company debts unless they have provided personal guarantees, so it is useful to take this into account when considering the financial implications.
To close a company with debts, a formal insolvency procedure will usually be needed. This might include a members’ voluntary liquidation, which is also an option if you are dissolving a solvent limited company.
In the case of insolvency, the interests of creditors are prioritised over those of directors or shareholders. If debts are not paid, the company might be forced into compulsory liquidation. Creditors may commence legal action and you might face a winding-up petition or a creditors’ voluntary liquidation (CVL), which gives you less control over your company dissolution. For this reason, it is important to act quickly. It is always best to consult with an insolvency practitioner for advice on the correct procedure for closing an insolvent limited company.
Dissolving a company with debts in the UK can be complex, and given that the process depends on whether the company is solvent or insolvent, it can be hard to know which solution will deliver the outcome you want. Speak to the team at Company Insolvency Advice today for practical guidance on the business rescue solutions that are open to you, and support that is tailored to your specific needs. Call us on 0800 999 0666 or use our online enquiry form to request a call back at your convenience.
