The Dangers of Dissolution
The growing number of companies currently struggling with their financial affairs has seen the prudent question of ‘why pay to liquidate, when I can wait for dissolution?” increasingly asked.
Of course, most companies asking themselves this question have either become accustomed to watching their pennies or simply cannot afford the services of an Insolvency Practitioner. However, depending on the circumstances of the company, the dangers of dissolution could outweigh the monetary consideration and therefore it is imperative that these potential implications are considered.
A company does not have to be insolvent to be considering dissolution as an option. It could be that the shareholders wish to cease trading the company, pay creditors, make a distribution to shareholders and dissolve the empty shell of the company.
This is an option, however from the date of dissolution all assets belong to the Crown as ‘Bona Vacantia’, including potential rights of action against shareholders for unlawful dividends. This relates to the change in Legislation of ESC C16, meaning that if a distribution is made to shareholders, it must be done in accordance with the legislation, and not give rise to a claim for unlawful dividends.
In a solvent situation there is also the danger that a creditor may not be notified of the dissolution and therefore not be paid. An aggrieved creditor can apply to restore the company to the Register of Companies within 6 years of dissolution, therefore the company should ensure all contingent liabilities are identified and paid before seeking dissolution. If a company is restored to the register it can be subject to formal Insolvency proceedings and the directors and shareholders could be held accountable for any of their actions.
It should be noted that whilst dissolution is not an Insolvency Procedure it should be compared with Formal Insolvency Procedures such as Members and Creditors Voluntary Liquidations (MVL’s / CVL’s), in order for the parties concerned to be fully aware of the potential risks to both themselves and the company.
It is therefore vital for directors to take advice earlier rather than later to ascertain the correct procedure needed to either Liquidate or Dissolve their company.
DCA offers initial consultation in confidence, without charge. To arrange an informal meeting, contact Debbie Cockerton on 01702 344558 or take advantage of our “UK Recovery Helpline” which operates 7 days a week, (8am to 8pm) on 0800 066 2544.