Dissolving a Company: What Does it Mean?

Dissolving a company refers to the process of removing or “striking it off” the Companies House register. Once a company has been dissolved, it becomes illegal for it to continue trading. Read on to find out why this may happen and whether HMRC can still pursue a dissolved company.

Jeff Salway Last updated on 15 October 2021.
Dissolving a Company: What Does it Mean?

Dissolving a company may sound like a dramatic option to take, but there are a number of reasons why it can happen. Whether the business has fulfilled its aims and reached the end of its natural life, or financial problems have begun to mount, dissolution is one way of shutting it down.

There are plenty of considerations and a few need-to-knows if you’re thinking of taking this step. Read on to find out more.

What does it mean to dissolve a company?

Dissolving a company is a formal way of closing it. Dissolution refers to the process of ‘striking off’ (removing) a company from the Companies House register.

It can be the most straightforward way of shutting a company down once its directors have decided it should no longer trade.

Why would a company be dissolved?

There are both voluntary and involuntary reasons for dissolving a company.

Voluntary dissolution often occurs when the directors decide the company has served its initial purpose and doesn’t need to continue trading.

It may also happen when partners have fallen out and can’t agree on the future direction of a company. Directors might also move to close a company down if they can see that it will become harder to keep the finances intact.

A company can also be voluntarily dissolved in the event of insolvency, when cash flow problems or balance sheet issues mean that bills and debts are no longer being covered.

There are also instances of involuntary dissolution, in which Companies House will move to legally close down companies that have fallen behind on responsibilities such as tax returns and accounts.

» MORE: Everything you need to know about business insolvency

If a company has debts, can it still be dissolved?

Yes, but only within strict limits.

Generally, a company can be dissolved when there’s no debt to repay, but it can also be done if the directors can show that the outstanding debts can be repaid within 12 months. They need to sign what’s called a ‘declaration of solvency’, promising that the company will be able to repay its debts within that period.

It's important to notify any creditors of the plan to dissolve the company, and there can be serious legal consequences for failing to do so.

If outstanding debts aren’t likely to be cleared within 12 months, liquidation becomes the more realistic option.

» MORE: Can a director be held personally liable when a business goes bust?

Can a company that’s dissolved still operate?

No – dissolving a company means closing it down completely.

Once a company has been removed from the Companies House register it becomes illegal for it to continue trading. There are potentially serious legal consequences for the directors of a company that does remain active after it has been struck off.

However, it is possible to restore a company to the Companies House register, and you’re still allowed to use the name of the dissolved company if you’re setting up a new one, provided the name hasn’t been taken since it was struck off.

In contrast, liquidation usually means that the name can no longer be used.

Can HMRC pursue a dissolved company?

Yes, there are a number of instances in which HMRC might want to take action, even when a company has been dissolved.

This is because the process of dissolution includes paying outstanding tax bills, providing up-to-date accounts and filing tax returns, among other responsibilities to HMRC. Naturally, the tax office keeps a close eye on these things.

Perhaps more importantly, HMRC and other creditors are still able to pursue a company to recover any unpaid debts, even after it has been dissolved.

Can you dissolve a company voluntarily?

Yes, and this does often happen. Companies House wants certain conditions to be met by anyone seeking to voluntarily dissolve their business.

For instance, it will accept applications for strike off if a business has not traded or changed names in the last three months, has no current debt repayment agreements in place, and isn’t being threatened with liquidation.

There are also certain boxes that need to be ticked in order to close a company down properly. The Companies House website has more details here.

Image source: Getty Images

About the author:

Jeff is a freelance journalist who writes across finance & business. He was the personal finance editor at The Scotsman & Scotland on Sunday & a member of the Financial Services Consumer Panel. Read more

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