What Happens to Directors of a Dissolved Company?
Many see a company strike-off as a cheap alternative to liquidation without being fully informed about what happens to the directors of a dissolved company.
Company dissolution is only appropriate in select circumstances – when misused, it can have major negative consequences.
Directors may lose their company assets to the Crown, become personally liable for company debts or get disqualified from acting as a director in the future.
In this guide, we’ll explain how company dissolution works, when it is appropriate, and what other options are available.
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What Is Company Dissolution?
Company dissolution occurs when a company is removed from the Companies House register, ceasing its existence as a legal entity.
The process may be initiated by directors voluntarily or compulsorily by Companies House itself.
Directors can voluntarily strike off their business from the Companies House register by filing a DS01 form. This costs £8 to submit online or £10 to submit by post. After three months, if no objections are received from creditors, your company will be removed from the register and shut down.
Compulsory strike-off takes place when Companies House removes a business from its records for failing to comply with its regulations. You might not have filed your annual accounts on time, or perhaps you haven’t updated your current registered address. If the issue isn’t fixed and no objections from creditors are received, the company will be removed from the register after three months.
When Is Company Dissolution Appropriate?
Company dissolution is a solid choice when you have a small, solvent company you no longer need.
Maybe the market has dried up, or perhaps you simply want to move on to other projects.
If the business has no real assets or liabilities to worry about, then company dissolution can be a cheap and easy way to shut it down formally.
Sometimes, directors initiate the process themselves, and sometimes they wait until Companies House does it for them.
However, in most cases, liquidation is the more appropriate option.
What Is the Difference Between Company Dissolution and Company Liquidation?
Company dissolution and company liquidation are similar in that they both result in the closure of a company.
There is one key difference to keep in mind, though.
Company dissolution simply closes a company down, while liquidation closes a company down and handles all of its assets.
A liquidation ensures that a company’s affairs are handled properly, helping avoid legal and financial problems down the line.
Compulsory dissolution, on the other hand, can have some nasty unforeseen consequences.
What Are the Risks of Company Dissolution?
Unlike liquidation, company dissolution doesn’t deal with a company’s assets or affairs.
This means that, if misused, dissolution can create big problems for directors.
The Crown Could Assume Your Assets
When a company is struck off, it ceases to exist. This means that any assets belonging to the company become “vacant goods” and are left without an owner. In the United Kingdom, the Crown automatically assumes any vacant goods.
As a result, dissolution risks losing your business’s hard-earned funds, property and equipment.
You’ll have to apply to have the company restored your assets back. If you struck off your company voluntarily, you’ll need to do this via a court order, resulting in expensive fees.
You Risk Facing Legal Charges
If your company is insolvent, your duty as a director fundamentally changes.
Instead of promoting the interests of the company and its shareholders, you must prioritise the interests of your company’s creditors.
However, going through dissolution doesn’t deal with the company’s debts. Removing the company from the register will leave your creditors unable to pursue what they’re owed.
However, creditors can still apply to restore your company. They can then force it into liquidation to receive payment. An investigation will then be held into your conduct as a director, assessing whether you acted in your creditors’ best interests.
Allowing your company to be struck off will be viewed as an attempt to dodge your responsibilities to creditors, leaving you open to misfeasance charges.
Misfeasance can result in severe penalties:
- May be made personally liable for company debts
- Could be hit with hefty fines
- Can be disqualified from acting as a director for up to 15 years
You Could Lose Money on Tax
If your company has net assets of £25,000 or more, company dissolution is not the recommended closure route.
While you will avoid having to pay professional liquidation fees, you will lose more on tax.
Any returns over £25,000 are subject to full Income Tax when you close a company. This is very costly when compared to other methods of company closure.
You Will Not Be Able to Claim Redundancy
A lesser-known fact about insolvent liquidations is that directors can claim redundancy alongside employees.
You’ll need to prove that you’re an active employee of the company and work at least 16 hours a week. The amount you receive depends on your age, salary and length of service.
Directors receive an average redundancy payout of £12,000. This can be a significant lifeline if the business was your primary source of income.
However, only directors of a liquidated company can claim redundancy. If you’ve undergone company dissolution, you will not be eligible.
What Are the Alternatives to Company Dissolution?
When closing your company, you should always seek the advice of an insolvency practitioner.
Our team can ensure you are guided towards the best possible outcome for you and your business.
Closing a Solvent Company
When closing a solvent company, directors are generally advised to pursue a Members’ Voluntary Liquidation.
This allows businesses with assets of £25,000 or more to sell their assets and return the proceeds to company members at the most tax-efficient rate possible.
Returns under an MVL are subject to Capital Gains Tax rather than full Income Tax. This means only the profit on the sale of the asset can be taxed, not the whole amount received.
For example, if you bought an asset for £5000 and sold it for £5250, only the £250 could be taxed.
You may also be eligible for Business Asset Disposal Relief. This halves the rate of Capital Gains Tax from 20% down to just 10%.
Closing an Insolvent Company
A Creditors’ Voluntary Liquidation is the most common form of company closure in the UK. The process deals with the concerns of creditors and provides directors with a safe exit from the business.
Control of the business is taken from the director and handed over to a liquidator, who sells the company’s assets to repay creditors. All remaining debts are then written off.
The money raised from the liquidation usually covers the fees of the procedure.
A CVL helps to ensure that you uphold your directorial duties, meaning you won’t have to personally repay the company’s debts, you won’t receive large fines, and you won’t be prevented from acting as a director in the future.
Saving an Insolvent Company
Debt issues don’t necessarily spell the end of the road for a company; there are a few insolvency procedures available to help turn things around.
The first of these is a Company Voluntary Arrangement. This is a payment plan brokered between you and your creditors, which stretches out the time you have to repay and reduces your monthly overheads. So long as you keep up with your instalments, your company will be protected from closure.
You’ll need the backing of 75% of your creditors to enter into a CVA.
The alternative rescue option is administration. This places the company into a ‘moratorium’ period where it is safe from closure while an administrator tries to get it back on its feet. This is often used to get a company stable enough to enter into a CVA.
Speak to an Expert
If you’re considering company closure, you should speak to an insolvency practitioner as soon as possible.
Each solution is tailored to a different situation. Our experts can assess your situation and guide you to the best possible outcome. Dissolution could be ideal for you, or you might find you need the assistance of a liquidator to protect your financial and legal interests.
Get in touch to book a free consultation today.
