Can You Dissolve a Company With Debt
When a company dissolves, or liquidates, this means the company is being permanently ended both in legal terms and for all practical purposes.3 min read updated on February 01, 2023
Updated October 29, 2020:
Can you dissolve a company with debt? When a company dissolves, or liquidates, this means the company is being permanently ended both in legal terms and for all practical purposes.
There are a few ways of dissolving a company. The most important factor in choosing a method of dissolution is whether the company is able to pay off its debts. If the company still owns assets it can sell, then liquidation is usually the best method of ending a company.
To liquidate, a company must pay off its debts using money raised through restructuring finances and selling off assets. Companies seeking liquidation should hire an insolvency practitioner. This is a professional who will make sure all financial calculations are correct and that the liquidation process is performed correctly.
What Happens to a Company's Debt?
A dissolving corporation may owe the following types of debt:
- Bank loans or overdrafts
- Debt to shareholders or directors
- Payments to suppliers
- Leases and similar commitments
- Final corporation tax payments
- Final accountancy fees
If these debts or any others cannot be paid, the company can either be liquidated or go into administrative dissolution. Usually, a company will sell off assets and use the money to pay the costs of liquidating.
There are some cases where the best way to dissolve a company with debt is through administrative dissolution. This is usually the best choice if the company has no assets to sell and no other funds available to pay for liquidation.
In an administrative dissolution, an insolvency specialist works with the director of the corporation to clear all debts and close the company. Administrative dissolution is usually less expensive than a total liquidation.
How Can You Dissolve a Company With Debt?
Corporations that are able to pay off their debts and want to close down need to follow these important steps:
- Take on no further business.
- Repay any loans taken by the directors.
- Pay back all debts.
- Keep the company bank account open until all the debts clear.
- Deal with any company vehicles by contacting the leasing or selling companies.
- Run the final payroll and make a return.
- Keep at least one director until closure is final.
- Prepare final accounts for submission.
- Pay the last corporate taxes out of the corporation's bank account.
- Pay out any remaining capital to shareholders.
- Remain inactive for a minimum of three months with all debts paid.
It is possible for a company to voluntarily liquidate through either Members' Voluntary Liquidation or Creditors' Voluntary Liquidation.
Members' Voluntary Liquidation is an option only for a corporation that is able to pay off all debts and has assets with enough value to cover all remaining liabilities. If a company has a lot of debt but is able to cover it by selling off assets, then the company is still considered solvent.
How Does Voluntary Liquidation Begin?
Dissolving or voluntarily liquidating a company takes more than a few weeks. It is normal for a company to technically continue to exist for a few months as it goes through the process of dissolution.
Liquidation begins when the board of directors or owners propose a resolution to dissolve. A 75-percent majority of the shareholders must approve this resolution in order to continue with liquidation. Then the creditors hold a meeting where the directors and insolvency practitioner explain the financial situation.
The board will look at the finances and approve a process. That process will include a plan to pay back debts. The company will need to find a way to pay off as many of the vendors as it can and notify them that the process is beginning.
What Happens to Company Directors?
Directors of a company are free to move on if the following criteria are met:
- The corporation has liquidated.
- The company has paid creditors.
- Creditors have written off any remaining debts.
- The process has revealed no improprieties in the company.
Directors are not personally liable in most cases. They are liable if any of the following are true:
- They have given a personal guarantee to a secured creditor.
- They are found guilty of illegal trading.
- They are found guilty of improper conduct during their tenure as director.
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