What happens to debts when a company is dissolved?

Updated: 23rd February 2020

When you dissolve a limited company, whether through Members’ Voluntary Liquidation (MVL) or voluntary strike-off, any debts that are still owed must be repaid. Members’ Voluntary Liquidation is administered by a licensed insolvency practitioner (IP) who ensures that creditors are repaid in full.

Company dissolution, however, is carried out by the directors of the company, who may be unaware that the company can be restored if debts still exist. Creditors must be informed of the intention to strike-off the company so they can object if necessary, and it’s the directors’ duty to make sure they contact all creditors.

Is the company solvent?

Solvency is the main initial consideration when thinking about dissolving and closing down a company, as if it’s not solvent, directors must consider an insolvent liquidation. Where a Members’ Voluntary Liquidation is concerned and a company does have debts, the liquidator will realise the company’s assets to repay creditors and then distribute any excess funds among shareholders.

Prior to this, directors sign a Declaration of Solvency to state the company can repay within a period of 12 months. If directors are considering dissolving the company themselves, they distribute the company’s assets, bring its tax position up-to-date, confirm the ability to pay any debts, and close down the business over a period of three months.

What if debts still exist?

Sometimes debts still exist even when directors have made a formal statement that the company was solvent when dissolved. Regardless of whether this is done deliberately, it’s likely that the creditor(s) involved will seek to have the company restored to the register.

This leaves directors open to accusations of misconduct, as they’re expected to know their company’s financial position at all times. The company may then need to undergo an insolvent liquidation process called Creditors’ Voluntary Liquidation (CVL).

How to close down a company with debts

Creditors’ Voluntary Liquidation is the appropriate way to close down a business that still owes money. A CVL places the interests of those owed money to the fore, and ensures they receive the highest return possible in the circumstances.  It is also possible that by taking this route the directors could claim redundancy pay if they’re also employees of their limited company.

Dissolving a company with debts via voluntary strike-off is not a good idea for directors. In reality, it’s unlikely that Companies House will grant an application for strike-off if debts do still exist - the application for strike-off is publicly advertised, which means creditors can view it and make an objection.

Begbies Traynor can provide more detailed information on company dissolution, and solvent/insolvent liquidation, and will ensure you understand how each process works. Please contact one of our partner-led team to arrange a same-day consultation free-of-charge. We operate a wide network of offices throughout the UK.

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