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Introduction to Dissolving a Company with Debts
Starting a business is an exciting endeavor, but it’s not always smooth sailing. Sometimes circumstances beyond your control, such as a downturn in the economy or a global pandemic, can lead to your company incurring debts that become unsustainable. If your company is struggling with debts, dissolving it may be the only option. This guide will provide you with detailed information on dissolving a company with debts under UK law.
Table of Contents
Understanding the Legal Structure of Your Business
Before considering dissolving your company, it’s essential to understand its legal structure. If you are a sole trader or in a partnership, you will be personally liable for any outstanding debts. This means that your personal assets, such as your home or car, could be at risk if the company is unable to pay its debts.
On the other hand, if your company is a limited liability company, the shareholders are not personally liable for the company’s debts. Limited liability companies are separate legal entities from their owners, which means that the company’s debts belong to the company, not the owners.
Process for Dissolving a Company with Debts
If your company is a limited liability company, follow the legal procedures to dissolve it. The process involves passing a resolution to wind up the company, appointing a liquidator to manage the company’s affairs, and notifying all creditors of the company about the winding-up process.
Resolution to Wind Up the Company
The first step in dissolving a limited liability company is to pass a resolution to wind up the company. This involves calling a general meeting of the shareholders and passing a resolution to wind up the company. A special resolution requires a 75% majority vote by the shareholders. Once the resolution is passed, the company is deemed to be in liquidation.
Appointment of a Liquidator
The next step is to appoint a liquidator to manage the company’s affairs. A liquidator is an independent insolvency practitioner who will take over the management of the company and be responsible for selling off any assets of the company to pay off its debts. The liquidator will investigate the affairs of the company and ensure that all creditors are paid in the correct order of priority.
Notifying Creditors
Once the company is in liquidation, the liquidator must notify all creditors of the company about the winding-up process. Creditors can then submit their claims to the liquidator. The liquidator will investigate each claim and pay creditors in the order of priority.
Role of the Liquidator
The liquidator’s role is to ensure that the company’s affairs are wound up in an orderly and efficient manner, with the aim of maximizing the return to creditors. The liquidator will sell off the company’s assets, including any stock, machinery, and equipment, and use the proceeds to pay off the company’s debts. The liquidator will also investigate the company’s affairs and ensure that any outstanding issues are dealt with appropriately.
Payment Priorities of Creditors
Creditors with secured debts will be paid first, followed by preferential creditors such as employees, and finally, unsecured creditors such as suppliers and contractors. If there are not enough assets to pay off all the company’s debts, the liquidator will declare the company insolvent and apply to the court to have the company dissolved. The company will be struck off the Companies House register and will cease to exist.
Insufficient Assets to Pay Debts
If there are not enough assets to pay off all the company’s debts, the liquidator will declare the company insolvent and apply to the court to have the company dissolved. The court will then appoint a receiver or liquidator to wind up the company’s affairs. The company will be struck off the Companies House register and will cease to exist.
Legal Action Against Directors of a Dissolved Company
Directors of a dissolved company can still face legal action even after the company has been dissolved. If the liquidator finds that a director has acted improperly or has breached their fiduciary duties, they can bring legal action against them to recover any losses suffered by the company.
Directors who have been found guilty of wrongful trading or fraudulent trading can be disqualified from acting as a director of any company for up to 15 years. Directors who have been found guilty of other types of misconduct can be banned from acting as a director for up to 5 years.
If the liquidator finds that the directors have misused company funds or assets, they can apply to the court to have the directors held personally liable for the company’s debts. The court can order the directors to repay any debts owed by the company or face legal action.
Voluntary Liquidation
In some cases, a company may choose to voluntarily liquidate when it is unable to pay its debts. Voluntary liquidation can be initiated by the shareholders or directors of the company, and it is typically faster and less costly than compulsory liquidation.
To voluntarily liquidate a company, the directors must pass a resolution to wind up the company and appoint a liquidator. The liquidator will then take over the management of the company and sell off any assets to pay off the company’s debts. Creditors will be notified of the winding-up process, and the company will be dissolved once all debts have been paid off.
Dissolving a Company with Debts Conclusion
Dissolving a company with debts can be a difficult and complex process, but it may be necessary if the company is unable to pay its debts. If you are considering dissolving your company, it’s important to understand the legal structure of your business and the procedures for winding up a limited liability company.
The process of dissolving a company involves passing a resolution to wind up the company, appointing a liquidator, and notifying all creditors of the company about the winding-up process. The liquidator’s role is to ensure that the company’s affairs are wound up in an orderly and efficient manner, with the aim of maximizing the return to creditors.
Directors of a dissolved company can still face legal action even after the company has been dissolved, so it’s important to ensure that you have acted properly and not breached your fiduciary duties. Voluntary liquidation may be an option if the company is unable to pay its debts and wishes to avoid compulsory liquidation.
If you are considering dissolving a company with debts, it’s important to seek professional advice from an insolvency practitioner or lawyer to ensure that you follow the correct procedures and protect your personal assets from being at risk.
If you are thinking of dissolving a company with debts call one of our trained advisors for confidential advice and support on 0800 088 2142.
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