Dissolved companies owe £4.7bn to creditors

20 November 2012

Experian, the credit reference firm, has done some research and discovered that each year companies that are dissolved or closed down without going through a formal insolvency process owed £4.7bn to creditors.  This compares to the £11.7bn owed by companies that have gone into administration, or liquidation.

The credit ratings company analysed firms which closed down voluntarily since 2000 and found that taken individually, the debts left behind are small – around 35pc of these firms had less than £10,000 of total assets.

However, Experian said the “sheer volume” of businesses using this apparently benign route are generating a significant combined loss to creditors.

Max Firth, of Experian, said: "Most firms that apply to be struck off tend to have little or no debt owed to other businesses. However, hidden among these seemingly harmless business closures is a level of debt that has previously gone undetected.”

Not sure what the point is of this research/statement as it is inevitable that thousands of businesses are going to close owing small amounts of  money that  they can't pay and it is not cost effective for creditors to recover.  But the largest such creditor is almost certainly HMRC.

The cost of employing an insolvency practitioner to put a company into a voluntary liquidation when the debts are small sometimes does not make financial sense. But as a director simply waiting until your company has completely run out of money is not good management. If the dissolution is rejected by say HMRC, then the company may be wound up by the Courts initiated by HMRC.

Then you will meet the Official Receiver and have to explain why the directors apparently drained the company of cash and left creditors with nothing. Does this sound like directors acting in the best interests of creditors? No, well it won't to the OR either. Thus personal liability for the HMRC tax debts or other creditors may become a real possibility.

When a company stops trading and owes nothing, or very small amounts of money then dissolution is one of the ways to bring matters to an end.  However, if the company has larger debts, then any creditor can oppose the dissolution and a compulsory liquidation may occur.  In any liquidation the conduct of the directors will be investigated.  So if you want to close the business make sure you do it properly.

The smart options is to ensure that before there are no funds left, you should place the company into creditors voluntary liquidation.