Directors may choose to voluntarily dissolve a business for a range of reasons, such as the retirement of the owner, the end of the useful life of the company from a legal perspective, or simply because it proved to be an unsuccessful venture. It’s the simplest and most cost-effective way to close a private limited company – but it isn’t always as straightforward as many directors hope it would be.

As you might imagine, the ease with which a company can be officially removed from the Companies House register – also known as ‘striking off’ – depends on its financial health. In this blog, we’ll look at whether closing a limited company with debts is possible, and, if so, what happens to debts once a company is dissolved.

What are the pros and cons of dissolution?

We’ve already alluded to how dissolving a business can be cheap and relatively straightforward, provided that you meet the company dissolution criteria. All you need to do is pay an £8 (online) or £10 (offline) disbursement fee to Companies House and fill out and submit form DS01.

That’s it. There are no liquidation costs, no enquiry into your conduct as a director and no implications for future directorship. Once the DS01 form has been submitted and processed, a notice will be published in the Gazette to notify interested parties that your company will be removed from the Companies House register in three months’ time. No trading or other business (e.g., sale of property) is permitted to take place during this period.

A business must be debt free to dissolve or be struck off. If creditors, staff or other directors object to the dissolution, they are free to do so and each objection will be considered by Companies House.

A company can be resurrected up to six years after dissolution if it shouldn’t have been struck off so that creditors can resume their claims against it. Directors can also be held personally liable for outstanding company debts.

Closing a limited company with debts

It’s not possible to dissolve a company with outstanding debts. If you try to do so as a means of evading your creditors, you could be prosecuted and even barred from acting as a company director for a period of up to 15 years.

Creditors have a legal right to recover any debts owed – if the company has been closed, that might mean directors are made personally liable for company debts.

If you wish to close a company and don’t have funds to pay outstanding debts, using a formal insolvency procedure known as a creditors’ voluntary liquidation (CVL) is an option.

In a CVL, an insolvency practitioner will be tasked with selling your company’s assets and distributing the proceeds to creditors.

Any debts that are not repaid from the sale of company assets will be written off, and creditors cannot pursue you personally.

When are directors personally responsible for company debts?

Limited liability provides directors with protection of their personal assets should their company accrue debts that can’t be repaid from the sale of company assets. Once an insolvency practitioner has done all they can to pay back debts owed to creditors, all other outstanding arrears will be written off.

But, there are a couple of exceptions. If you fail to shut down the business properly (e.g. attempt to dissolve the company with outstanding debts), or continue to trade when the business is insolvent, you could lose the protection of limited liability.

Also, if you have signed a personal guarantee in order to secure funds and the creditor has not been paid back after the insolvency practitioner has done their bit, you would be personally liable for the debt.

To guard against the risks of a personal guarantee, you should consider pre-emptively taking out personal guarantee insurance when securing finance or a loan for your company.

With personal guarantee insurance, you can cover up 80% of your risk, so you’re personally protected as you plan the future funding and growth of your business. For more information on what personal guarantee insurance involves, speak to a risk management insurance company today on 0208 004 7250.