Dissolution is an effective method of closing a company. It is cost-effective, well-structured, and relatively easy to implement. However, it is a method only available to solvent companies, meaning all debts and liabilities must be paid before a company goes into dissolution. Directors who attempt to dissolve an insolvent company (i.e. one with debts) will make themselves vulnerable to legal action, and potentially be chased by HMRC, even after their company has been dissolved. As such, it’s essential that directors understand the dissolution process, and what to do to ensure HMRC does not chase their dissolved company.
In this article, Clarke Bell will discuss company dissolution, what might cause HMRC to chase your dissolved company, and how you can avoid it.
What is company dissolution?
Company dissolution is one method to close down a solvent company. It can be initiated voluntarily by a company’s directors, starting with the filing of a DS01 document. This can be done for as little as £8 online, or £10 using a paper document.
Once approved, a notice of your intentions to dissolve your company will be published in the Gazette, giving third parties the opportunity to object to the dissolution. Objections are typically made only when a company is insolvent, and outstanding creditors (i.e. people who are owed money from the company) spot the attempted dissolution. Assuming no objections are made, your company will be dissolved and removed from the Companies House register.
This is usually where the process ends. After the company has been struck off from the Companies House register, it ceases to be a legal entity. However, there are some instances where HMRC will take an interest in a company, even if it is already dissolved.
What causes HMRC to chase a dissolved company?
In the vast majority of cases, HMRC will chase a dissolved company to collect unpaid debts. They can do so for up to six years after the dissolution of a company. This can be due to a petition to reinstate a company, submitted by the company’s outstanding creditors, or because the company owes a debt to HMRC. There is a third scenario wherein HMRC will take an interest in a company, but it is not for debt collection. Instead, if there are suspicions that a company’s directors have engaged in fraudulent practices, HMRC may chase them for up to 20 years.
If HMRC decides that a dissolved company still owes an unpaid debt, or that directors of the company have engaged in fraudulent practices, they will submit an application for reinstatement to the courts. If approved, the company will be reopened, restored to the register kept at Companies House, and it is then vulnerable to legal action. At this point, the dissolution of the company is essentially reversed.
Once the company is reinstated, HMRC can open a full investigation into the company and its directors. Dissolving a company with outstanding debts is treated as an attempt to escape obligations to creditors. This misconduct carries significant penalties if evidence is found, including the disqualification of a director’s license for up to 15 years, fines, personal liability for company debt, and even a prison sentence.
What does HMRC look for when investigating a dissolved company?
HMRC conducts thorough investigations into companies when there are suspicions of misconduct or unpaid debts. If money is owed to HMRC itself, you can expect no stone to be left unturned. That said, HMRC will conduct its investigations with certain goals in mind. Namely, HMRC will be looking for evidence of particular examples of director misconduct.
HMRC will look for examples of ‘preferential payments’ if money is owed. This refers to when directors repay certain creditors according to their own order of priority, as opposed to the legal order of priority. Usually, this happens when directors repay loans secured by personal guarantees or business assets, while forgoing unsecured loans. Directors may wish to do this to avoid having assets seized or become personally liable for company debt, but if evidence of doing so is found, it can lead to serious problems.
Similar to the above, HMRC will look for evidence of directors intentionally defrauding their creditors. An example of this could be directors using creditor funds to pay themselves a salary, despite knowing the company is insolvent and has no way of remedying the situation. Rather than using the money for the stated purpose, it is used to enrich these directors personally. Should evidence of such an action be found during HMRC’s investigation, serious consequences can apply.
Evidence of Misfeasance
Finally, HMRC will look for evidence of misfeasance. This refers to when company directors act in their own interests, rather than in the interests of creditors and shareholders. While the lines between misfeasance and fraud can blur, there is a distinction. Directors who deliberately take action resulting in negative financial consequences for the company are guilty of misfeasance. Deceiving creditors does not necessarily happen, unlike in cases of fraud.
If HMRC finds evidence of any of these practices, then the aforementioned consequences can apply. In cases of fraud and misconduct, directors run the risk of being held personally liable for company debt. This means their personal finances will not be protected, as is typically the case for directors of a Limited Liability Company (LLC). As such, it is best to close a company with outstanding debts using proper means.
Closing an insolvent company using a Creditors’ Voluntary Liquidation
If your company is insolvent, meaning it cannot pay its debts and liabilities within 12 months, then dissolution is not an option. Instead, you should contact a licensed insolvency practitioner for help.
A Creditors’ Voluntary Liquidation (CVL) is often the most appropriate course of action for companies with unpayable debts. During this procedure, the insolvency practitioner who you appoint will take charge of your company and communicate with your creditors. Before closing your company, the insolvency practitioner will liquidate any company assets, distributing the proceeds amongst outstanding creditors. Once all assets have been liquidated, your company will be wound up and removed from the register at the Companies House, and your obligations to creditors will have been upheld. By taking this route, you will protect yourself from accusations of misconduct or misfeasance, reducing the risk of HMRC investigating you or your company.
Clarke Bell can help you
If your company is struggling with debt, let Clarke Bell help.
We have more than 28 years of experience in helping companies find the best path forward, and we can do the same for you.
Contact us today for your free, no-obligation consultation, and find out exactly what we can do for you.