Can you strike off an insolvent company and what happens to its debts?
Strike Off is the quickest and most cost-effective way to close a limited company. You simply apply online and pay a nominal fee, and, as long as everything is in order, your company will struck off the official register at Companies House in Edinburgh after around three months.
There is an issue, though. Not all companies can be closed in this way. To strike your company off, it must be able to pay all its debts. If it has debts it cannot pay, i.e. it’s insolvent, you must close it using an insolvent liquidation procedure such as a Creditors’ Voluntary Liquidation (CVL).
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What is the Strike Off process?
It’s easy to see why Company Strike Off is so attractive to directors who want to close a limited company so they can retire, move onto something new or bring an end to a business they no longer need.
You can submit form DS01 or apply online to initiate the process. Your Strike Off request will then be published in the Gazette to inform your creditors and other interested parties. They have a two-month window to object to the Strike Off. If there are no objections and you meet the eligibility requirements for Strike Off, another notice will be published in the Gazette and your business will be removed from the register.
One of the benefits of Strike Off is that you retain control of the business throughout the process. However, you must bring the affairs of the business to an end properly. That includes settling all outstanding debts, paying final wages to employees, distributing the assets to the shareholders, filing final accounts and tax returns, and closing company bank accounts. Failure to complete these steps fully may lead to legal consequences and the ownership of company assets could pass to the Crown.
What happens to debts if you dissolve an insolvent company?
One of the key requirements for Strike Off is that the company is solvent. If you try to dissolve a company with debts, there are certain steps your creditors can take:
Creditors can object
If you try to dissolve a company with outstanding debts, creditors such as HMRC and the banks will usually object to your strike off application as it will make it more difficult to recover the money they are owed. They can do that by submitting a legal notice to Companies House. A hold will then be put on your application so the creditor can pursue the debt.
Creditors can apply to have the company reinstated
Even if the company is successfully struck off the Companies House register, any creditor still owed money can petition the court to restore it to the register up to six years from the date of dissolution. Once the company is restored, the creditor can pursue the debt. If no payment is forthcoming, they can issue a Winding Up Petition to force the company into Compulsory Liquidation.
Creditors will call in personal guarantees
It’s also worth noting that dissolving a company cannot shield you from the liability associated with personal guarantees. If you dissolve a limited company with an outstanding debt secured by a personal guarantee, responsibility for the debt will pass to the individual who signed it. The creditor can then pursue you for full repayment of the debt and your personal assets could be at risk.
What are the penalties for striking off an insolvent company?
As well as the prospect of a creditor objecting to the Strike Off process or petitioning the court to reinstate the company, the Insolvency Service can also investigate the actions of company directors and hand down penalties. The penalties will depend on the particular circumstances of the case, but can include:
- Fines
- An order to pay compensation to the company for the benefit of its creditors
- A directorship ban that prevents you from acting as a director of a limited company for 2-15 years
- In the most serious cases, you can even receive a custodial sentence for knowingly striking off a company that’s unable to pay its debts
How can you close a limited company with debts?
The prospect of penalties and creditor action means Strike Off is not a viable way to close a company with debts. Creditors’ Voluntary Liquidation (CVL) is a far safer option. You will appoint an Insolvency Practitioner to act as the liquidator and close the company on your behalf. They will sell the company’s assets and use the proceeds to repay its creditors as far as possible. Any debts the company cannot repay will be written off, except those secured by a personal guarantee.
In a CVL, the liquidator’s fee is usually paid using the money raised by the sale of company assets. You may also be eligible to claim director redundancy pay, which you cannot do if you dissolve your business. Average director redundancy payouts are around £10,000, which will more than cover the liquidation costs if the proceeds from the sale of assets are insufficient.
A CVL also provides the peace of mind that your company has been wound up properly and your creditors have been repaid according to the statutory provisions. That greatly reduces the risk of receiving any legal or financial penalties.
Thinking about closing a company with debts?
If you want to retire or are ready to cut your losses and close a Scottish company with debts, we can help you do it in an efficient, cost-effective and appropriate manner. We will assess your finances, discuss your circumstances and advise you on the best approach. Please get in touch for a free consultation with our licensed Insolvency Practitioners or arrange a face-to-face meeting at one of our offices throughout Scotland.
I knew I needed to close my company but I wasn’t sure how to go about this with large debts that I was unable to repay. Scotland Liquidators clearly explained my options and held my hand throughout the entire process.
Catherine Muller | Director
I would highly recommend Scotland Liquidators to anyone considering closing their business. From the first phone call I knew where I stood and what my options were. I cannot thank them enough.
Jonathan Booth | Director
Scotland Liquidators helped me close my company last year after I made the tough decision to stop trading. My advisor was patient, knowledgeable, and supportive from start to finish. Many thanks.
Colin Franklin | Former CEO
