What Happens to the Debts of a Dissolved Company?

What happens to business debts when a limited company has been struck off or dissolved?

As the director of a limited company you are given the protection of limited liability. This means that the company and its finances are completely separate from your own personal financial affairs. Simply put, the debts of the company belong to the company.

When a limited company is dissolved, it ceases to exist as a legal entity. This therefore means that in the vast majority of circumstances, any debt the company had at the time of being struck off, dies with the company. Therefore creditors or debt collectors are not able to chase individual company directors for repayment, nor are company directors expected to cover the shortfall left behind by their dissolved company.

However, there are some exceptions to this rule. If the director of a dissolved limited company provided personal guarantees for any of the company's borrowing, they will be held personally liable for repaying the money still owed.

Any personal guarantee will crystalise upon the company entering into liquidation, being struck off, or dissolved. This means the responsibility for repaying what remains of the borrowing will immediately shift to the individual who signed the guarantee. Dissolving the company does not free the director of the responsibility associated with a personal guarantee.

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What action can creditors take against debts after a company has been dissolved?

Depending on the scale and nature of the debts left outstanding after dissolving the company, creditors may be able to apply to have your company re-instated to the Companies House register. This would resurrect the company as a legal entity and would mean creditors could then chase for outstanding debts. 

Company restoration following dissolution may happen if creditors have reason to believe that there were assets in the company which would have paid the debt off. Having the company restored to the register would give creditors the opportunity of recovering this outstanding liability. Company restoration is a costly and lengthy process, however, if a creditor is looking to recover a significant sum of money and has reason to believe that the dissolved company had a high level of assets prior to its dissolution, they may well take this action.

Why liquidation may be a better option over dissolution

Due to the possibility of outstanding creditors taking further action, opting for a formal liquidation procedure can be a much more preferable option for closing down a company with debts rather than choosing to dissolve it. Once a company has undergone a formal liquidation procedure, the chances of it being restored to the Companies House register are extremely slim.

In the case of an outstanding creditor continuing to harass you personally, you would be able to simply direct them to the insolvency practitioner who handled your case who would be able to show that the company was closed down, its assets liquidated, and proceeds subsequently distributed in the correct manner and in accordance with the Insolvency Act 1986. When a company is placed into a formal liquidation process by an insolvency practitioner, reinstatement at a later date is much less likely to happen.

If you would like advice on closing down a company with debts, contact the experts at Real Business Rescue on 0800 644 6080. With a nationwide team of licensed insolvency practitioners and business debt specialists, we can give you help and guidance when you need it the most.