The short answer to the question of whether it is possible to dissolve a company with debts is yes, it is. However, there is a bit more to company dissolution than simply saying it is possible to run a firm with debts and then bail out without repaying them. Company directors are expected to at least service the debts they have with their creditors, after all, and legal proceedings may follow if directors have knowingly taken on more debt that they know their business will not be able to pay back. That said, most entrepreneurs and limited liability company principals do not operate this way and will often find themselves in debt through no fault of their own.
For example, according to Salient Insolvency, an insolvency practitioner firm that handles all sorts of company debts and winding-up processes for its clients, some businesses encounter unsustainable cash flow problems because a key supplier goes bust and they need to source more expensive alternatives. Others might become insolvent because of late or non-payments from customers. There again, historic debts might make some companies struggle financially even if their day-to-day trade is sustainable. Nevertheless, when temporary cash flow problems become more permanent or structural within a business model, dissolution may be the best way forward. What is likely to happen under such circumstances?
Firstly, business rescue services are available to companies with debts. These can help to save firms by either restructuring them to focus on profitable parts of the business or by renegotiating the terms under which company debt is repaid. In some cases, a creditors’ voluntary arrangement (CVA) may be sought to buy a viable but indebted business more time to sort out its problems before liquidation proceedings may become inevitable.
Secondly, company directors can seek voluntary liquidation proceedings, a way of legally winding up a firm that has debts. So-called creditors’ voluntary liquidations (CVLs) are commonplace in the UK. They will mean that assets the firm holds are liquidated – sold – so that creditors can be paid back as much as possible. Usually, a firm will be dissolved at the end of a CVL process and any outstanding sums that are owed will be written off meaning that creditors can no longer pursue former directors for anything more.
In some cases, company directors will seek to dissolve their own firm. Usually, striking a business off the official register of limited liability companies is reserved for solvent firms without debts that cannot be easily repaid from their liquid assets. However, it is important to note that firms with debts are allowed to apply for official company dissolutions. Under such circumstances, creditors are likely to object to such a striking-off application, thereby preventing it. The reason to do so would be to protect their interests in seeking as much of their debt to be repaid as possible. If so, it is likely that another route, such as a CVL, would be preferable. Note that attempting to dissolve a company that has current legal proceedings against it is not allowed. Nor is it possible to dissolve a company that has been trading within the last three months.