Business Law & Compliance

Guide To Dissolving A Company

Luisa Ddakis | 29 September 2022 | 2 years ago

alternative liquidation

When a company is no longer viable, the owners may choose to dissolve it. This may apply to a company that has ceased trading or has never traded. Dissolving a company is a relatively easy process, but it is important to understand what is involved before taking any action with your own company. There are many steps to take with each one requiring careful attention and the right knowledge if you want to avoid mistakes.

In this simple guide, we will cover everything you need to know about how to dissolve a company in the UK.

What Does it Mean to Dissolve a Company?

Dissolving a company is a term used to describe the process of closing a company down. This process is also known as ‘winding up’ or ‘striking off’ a company, and means that it will be removed from the Companies House register. Once a company has been dissolved, it no longer legally exists and can no longer operate.

Despite being a relatively easy procedure, there are some rules that apply to dissolving a company. These include:

  • The company must be debt-free (or solvent)
  • The company must have no ongoing legal action against it
  • The company must not be involved with a creditor agreement
  • The company cannot have changed names within the past three months
  • The company must not have traded within the past three months
If these rules do not apply, then another means of closing down the company must be sought.

Why do You Need To Dissolve a Company?

There are a number of reasons why you may need to dissolve a company and these can be both voluntary and involuntary.

Voluntary reasons for dissolving a company may include:

  • The company is profitable but has served its purpose
  • The company is no longer profitable
  • The company is no longer trading and is lying dormant
  • The shareholders agree that the company should be dissolved
  • The directors can no longer agree on how to run the company
  • There are debts and bills that are not sustainable
  • Personal reasons, for example, retirement or moving on to a new venture
Involuntary reasons for dissolving a company may include:

  • The company has failed to file its annual accounts or annual return
  • The company has been struck off the register by HMRC for failing to pay taxes
  • A winding-up order has been made against the company

What Should I Do Before Dissolving a Company?

There are many administrative tasks you need to do when dissolving a company and understanding the implications of this is imperative. Here are a few key things that you need to do:

  • Notify all shareholders of your decision to dissolve the company and give them an opportunity to object. You will need to distribute business assets to the shareholders.
  • Pay off any debts that the company has. This includes any money that is owed to HMRC.
  • Ensure the company’s accounts and taxes are up to date.
  • Close any business bank accounts and cancel any direct debits or standing orders.
  • If you have employees, you will need to notify them of the decision to dissolve the company and make sure that they are paid any outstanding wages or holiday pay. You may also need to provide them with a notice period in line with their contract.

How Do I Dissolve a Company?

If you have decided that dissolving your company is the best course of action to take, here are the steps you need to follow:

You will first need to dispose of assets by selling them and moving them away from company ownership, as well as distributing available funds to creditors.

If the company has debts, you must clear them before attempting to dissolve the company. HMRC should be informed of your decision to dissolve your company. If you cannot pay your debts, then the alternative is to speak to an insolvency practitioner who can assist you via liquidation.

Once you have cleared any debts, the next step is to complete the DS01 dissolution form. This must be signed by the majority of directors. As soon as the form has been sent to Companies House, you’ll need to share it with employees, shareholders, creditors, and anyone else of relevance.

So long as you do not receive any objections, the company will be removed from the Companies House register, and it is then officially dissolved.

how to dissolve a company

How Long Does It Take to Dissolve a Company?

The process of dissolving a company usually takes a minimum of three months from the time of application to dissolution, during which time creditors can object. You must also bear in mind the preparation beforehand as you make plans to wind down.

Why Might Someone Object to Dissolution?

In some cases, creditors, shareholders, or employees may object to the dissolution of a company if they feel that it would leave them out of pocket. For example, if the company has significant unpaid debts, the creditors may want to use the company’s assets to pay off what is owed.

If you are dissolving a solvent company (one that can pay its debts), then the shareholders must agree to distribute the company’s assets among themselves. They may object if they feel that the assets are not being distributed fairly.

Employees may object to dissolution if they are worried about not receiving outstanding wages. It is important to make sure you have paid what you owe before commencing dissolution.

What is a Dormant Company?

A dormant company is one that is not carrying out any business activity and has no plans to do so in the near future. Dormant companies will still appear on the Companies House register, but they do not receive any form of income.

A company can be dormant for a number of reasons, including:

  • To make preparations to launch the business
  • To protect a trading name
  • To restructure the company
  • Personal reasons such as time off from work
Dormant companies still need to file their annual accounts and annual returns with Companies House, and they must also notify HMRC of their status.

Dormant companies can decide to dissolve at any time, but it is worth bearing in mind that if the company wanted to become active again in the future, it would need to be re-registered.

Can You Dissolve a Company with Debts?

When it comes to dissolving a company, all debts owed must be paid off before commencing dissolution. If you are unable to pay off the debts, then you must seek other methods of closing down the company such as via liquidation.

If you proceed to dissolve the company with debts unpaid, creditors may have your company restored as a way to recoup payment and this can leave you open to serious charges of misconduct.

can you dissolve a company with debts

Dissolution vs Liquidation

Dissolving a company and liquidating a company are two very different things, although they are often confused. Liquidation is the process of selling off all assets belonging to the company in order to pay creditors, after which the company is wound up. For this process, you need a licensed insolvency practitioner to act as a liquidator.

Dissolution, on the other hand, is when a company is removed from the Companies House register. This can be done either by the shareholders or the directors, and it does not necessarily mean that all company assets have been liquidated. For this, you can complete a form yourself and do not need a liquidator to assist you.

Can the Company Still Operate Once it has been Dissolved?

Dissolving a company refers to the process of shutting the business down completely and removing it from the Companies House register. Once this process is complete, it becomes illegal for the company to continue trading. There are legal consequences for companies that do not desist after they have dissolved.

It is possible to restore a company that has been dissolved, however, either by application to the court or administrative restoration made to Companies House.

How Can I Restore a Dissolved Company?

There are two ways to go about restoring a dissolved company; either by applying to the court or by making an administrative restoration to Companies House.

If you would like to apply for administrative restoration, you must do so within six years of the dissolution date. The application will need to be made by the company’s former director or member. This process can prove to be expensive, and it may take some time to be approved. You will also need to provide annual accounts that will now be considered outstanding, as restoring the business on Companies House will mean it appears as though it was never dissolved.

A court restoration may be sought by a creditor, shareholder, or former employee who is owed money by the company. As a result of this procedure, the company may be temporarily restored in order to recover funds owed. Unlike with administrative restoration, you won’t have to submit annual accounts and therefore there will be no late fees applied.

What are the Advantages Of Dissolving a Company?

There are a number of advantages to dissolving a company, particularly if the company is no longer trading. Dissolving a company is typically less costly than liquidation as there is only a small online fee associated with the process.

It can also be quicker to dissolve a company than to go through the process of liquidation, which can take several months. Striking off a company is usually quick and easy, and can be done online.

Once a company has been dissolved, the directors are released from their duties and will no longer have the burden of an unprofitable company lingering above their heads. This can be a relief for directors who are struggling to keep the company afloat.

What are the Disadvantages of Dissolving a Company?

There are also a number of disadvantages to dissolving a company which you should be aware of before making the decision to do so.

Firstly, if the company still owes money to creditors, they may take legal action against the directors in order to recover what is owed.

It can be difficult to dissolve a company if there are disagreements among the shareholders. Once a company has been dissolved, it can also be difficult and expensive to restore it.

Dissolving a company does not release the directors from their duties if they have acted fraudulently or recklessly. The directors can still be held liable for any debts incurred during this period.

Are there Alternatives to Dissolving a Company?

There are several alternatives to dissolving a company depending on your company’s circumstances.

If the company is insolvent, liquidation may be the best option as it will allow for a fair distribution of assets among creditors.

If the shareholders cannot agree on how to run the company, it may be possible to sell the business, but you will need to find a buyer who is willing to take on the company’s debts and liabilities. You could also bring in new shareholders who can help make decisions. This is an option if you want to continue running the business under the new guidance.

Finally, if the only reason for dissolving the company is that it is no longer needed, it may be possible to simply close the business down without going through the formal process of dissolution. This can be done by ceasing to trade and notifying HMRC and other relevant authorities. In other words, the company will be dormant. However, you will still need to file annual accounts and returns until such time as you notify Companies House of the decision to dissolve the company.

Final Thoughts

Making the decision to dissolve a company is not always easy, and there are a number of factors you need to take into account before making a final decision. However, by following the steps outlined in our guide on how to dissolve a company, you can be sure that you are taking the best course of action. You should also seek professional advice if you are unsure about any aspect of the process.

If you have decided that dissolving your company is the best course of action, then ensuring the process is carried out correctly will guarantee a smooth and cost-effective dissolution.

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