Liquidation for a company means that it is permanently ending its tenure as a running business.
The dissolution of a company means ‘permanent end of its business.’ It will close all its operations, lay off workers, and close its accounting book. It will no longer be involved in any type of business transactions with third parties; it cannot make any financial decision and cannot advertise its services. So, if it incurs any debt, it will not be paying them.
The question that arises here is, ‘how can the investors get their money back from a company that is getting liquidated?’The biggest concern of the investors is to make sure that the company pays its debt first before it gets dissolved.
In this blog, you will learn about the options to pay the debt when dissolving a company.
First of all, if a company has any debt to pay, it can’t ‘get dissolved without paying back the debt.’ It has to pay back the debt in full before it dissolves.
The company can sell its assets to pay off the debt. To begin the process of liquidation, the company has to strike-off its name from the Companies House register.
It can only happen if it has paid its debt in full. If it hasn’t paid the debt, it can go for the Members’ Voluntary Liquidation (MVL) process.
Members’ Voluntary Liquidation (MVL) to Dissolve Company
Members of the company can voluntarily go for a liquidation process to dissolve the company, but they cannot do so because the company incurs a debt. In that case, the MVL will hire an insolvency practitioner who will sell off the assets of the company to settle creditors’ debt first.
Once the debt is settled, the rest of the assets will be divided among the members of the company, depending on their share value.
What happens to debts once a company is dissolved?
Usually, the company ‘cannot be dissolved until it has paid its debt in full.’ Even if the directors of the company try to liquidate it with debt, the creditors can file a complaint with the company registrar.
Once the complaint is filed, the registrar will bar the company from getting liquidated. Moreover, the registrar can also hire an insolvency practitioner to calculate the amount of debt the company has to pay. A company can have various kinds of debts, like:
- Bank loans
- Shareholder debt
- Supplier payment
- Corporation taxes
- Accountancy fees
To pay off the debt before getting liquidated, the company directors can also go for administrative dissolution.
In the administrative dissolution, the company will be controlled by the state government that can appoint a dissolution expert to pay creditors and then dissolve the company.
How to recover a debt after a company is dissolved?
Creditors can also recover the debt if the company is dissolved. However, this happens rarely. If the company is dissolved and the ‘creditors can prove that they are not paid for their services,’ they can complain to the directors of the company or with the company registrar. The company registrar knows the type of issues that can arise and works accordingly.
What assets can you sell to recover company debt?
Creditors alone can’t sell the company assets unless the company registrar has sanctioned it. The registrar will negotiate with the parties who would be interested in buying the assets.
These assets can be sold at a lesser price to pay the debt. Once the amount is paid in full to the creditors, the company can liquidate itself.
What is the liability of the company’s higher-ups?
The directors and the board of governors of the company are liable for paying back the debt if they signed a document with another party.
If the party can produce the signed agreement, the signatories (directors and the CEOs) will be held responsible for paying back the debt of the company.
However, this only happens when the directors have explicitly mentioned in the agreement that they will ‘be paying the debt when dissolving a company.
Can you object to a company liquidation?
If the creditors find out that the company is getting liquidated and that they are not paid for their work, they can object to it. They can send an application to the company, higher-ups in the company, or complain to the company registrar.
The company registrar can bar the liquidation of the company because it has outstanding debts on it. Once the debts are paid, the company can dissolve peacefully.
Final word
In one way or the other, the debt of the company must be paid to dissolve the company. The process of dissolution explained in this article will simplify the process for any company to liquidate without any worry.
