Last editedOct 20212 min read
Have you found yourself in a situation where a long-term customer is failing to pay their bills? It could be that you are now dealing with a dissolved company, which could leave them unable to pay the money that they owe you. In this case, it can be difficult to get paid on time, leaving your business with cash flow issues.
While it may be more difficult to collect money from an insolvent business, it is not impossible. So what happens to debts once a company is dissolved? Read on to find out more about the process and how you can avoid damages to your business due to another’s inability to make payments.
What does it mean when a company is dissolved?
Before learning about the significance for creditors, it’s important to understand the answer to the question: what does it mean when a company is dissolved? Essentially, this is a term for terminating all operations and formally closing the business, causing it to cease existing as a legal entity.
This might be due to a variety of reasons, such as the value of liabilities exceeding the value of assets, or perhaps the directors have no further use for the company. In any case, dissolution is a voluntary decision made by the directors who want to strike the company off the business list.
What happens if a company is struck off?
There are a number of steps that must be taken, including winding up operations, liquidating assets and dealing with shareholders. In more detail, these steps include:
Holding a meeting to make a formal decision with other directors and shareholders, who must approve the resolution to dissolve the company.
Paperwork must then be filed to the state, who will require a specific set of documents to be completed.
Following this, the company must file federal, state and local tax forms. A dissolved company still has an obligation to pay taxes before closing.
The company must then terminate its operations by settling debts, notifying any relevant parties (such as customers, suppliers, landlords, employees), and canceling licenses and permits.
Finally, the dissolved company must notify creditors. The business will inform the creditors of the decision to dissolve and provide information for submitting claims to collect debts, including a mailing address and a deadline for submission.
If a company is dissolved, what happens to its debts?
Now that you know what happens if a company is struck off, it’s important to also understand the process of settling debts with creditors. Unfortunately, the dissolution of a company can be detrimental for creditors, as it may involve hiring legal help or even lawsuits to achieve settlements.
The directors who make the decision to dissolve a company should initially check the amount of debts that are owed and factor this into the overall cost of dissolution. In this case, there should be minimal issues for the creditor. The dissolved company will notify the creditors of the decision and provide them with the necessary details to make a claim. This may include some negotiation, as the company may wish to pay slightly less than was originally owed. For this reason, it’s often a good idea to hire an attorney to assist you with this process.
In the other case, where directors have not correctly planned the budget with creditors in mind, the situation is a bit more complicated. The directors of the dissolved company are then open to accusations of misconduct and must undergo an insolvent liquidation process that is known as Creditor’s Voluntary Liquidation. This process prioritizes the interests of the creditor and aims to give them the highest possible returns.
We can help
GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.